Making Credit Work for You (Why Some Debt is Good!)

If I were to say ‘it is sensible to take out a bank loan if you can afford to’ people might question why. We have been educated that debt is bad and should be avoided as much as possible.

However, as logical as this may seem, avoiding debt entirely is not always in your best interests. Let me explain….

As a Mortgage Adviser, I often had to tell first-time homebuyers they were unable to get a mortgage.

Often, these individuals had budgeted well and been committed savers, and they had never had debt. You can imagine their disappointment, having saved so hard, to receive this news.

What was the problem?

When assessing a mortgage application, lenders review the applicant’s credit record and typically use this information to assign a credit score. The applicant needs to meet or exceed a certain score to be offered the mortgage. The smaller the deposit, the more risk to the lender and the higher the score required to get the loan.

Your credit record is a history of all your loans, credit cards and contracts over the past six years. It shows what debts you currently have and also provides details of how well you manage your debts: i.e. if payments have been made on time and if not, how often they have been missed and how quickly you caught up.

To calculate the score, points are awarded for meeting payments on time (and deducted for falling behind). If you have never had debt, it is difficult to achieve a high score.

So why am I telling you this now? Because taking out sensible, affordable credit to build up a credit record over time can benefit you in the future.

Your history of managing credit well will boost your credit score when it matters most – for the big-ticket borrowing.
Of course, borrowing has its downsides. One of these is paying interest: an additional amount you repay on top of what you borrow.
Interest payments are often unavoidable on your first credit agreement, but once you have a credit history there are opportunities to borrow without interest, so if you are savvy, you can continue to build your credit score without paying for the privilege.
And, as well as potentially paying no interest if you find the right deal, the cash you haven’t had to part with can be deposited into an interest-paying savings account, so you earn money on your savings whilst borrowing interest-free. Nice!

Take note!

When it comes to applying for any credit, outstanding debts will reduce what you can borrow elsewhere, so you should only take on what you can easily afford to repay, and clear it as quickly as possible.
Also – lenders do not look favourably on payday loans and other short-term debt arrangements – as these indicate you cannot manage your budget – so avoid these at all costs!.

As you can see, if you are careful and sensible, you can make debt work for you. That being said, it is easy for debts to get out of control if you are not careful. It is important to be sensible with the amounts you borrow and what you spend the money on.

A blog post by Hazel Bowen

Hazel Bowen is a Chartered Financial Planner who enjoys helping clients make the best use of their money and achieve their goals in life. Hazel is passionate about educating young people and considers money management a fundamental life skill that everyone should have the opportunity to learn. She regularly delivers financial education workshops across her Norwich region.

For more on the above and other money subjects, check out the Your Money Matters here.