Deciding on the best type of credit for you

Money Advice Service

When you’re borrowing money, it’s important to understand how much the different options cost and how they work. You also need to know how those costs vary depending on how long you want to borrow the money for.

What’s the best credit option for you?

Reason you need to borrow Consider Top tips
I want to buy something on credit and have flexibility in paying it back. Credit card –
some have 0% deals on purchases over an introductory period (up to xx months).
  • Only if you’re sure you can repay the debt within the 0% period.
  • Cards charge around 17% interest or more once the introductory offer finishes.
  • Set up a Direct Debit to make sure you don’t miss a payment.
  • Do not borrow more than you need.
  • If you’ve a poor credit record you might be charged a much higher interest rate – some cards also charge a fee.Find out more: Credit cards
I want to borrow some money but pay back a fixed amount every month. Personal loan –
might be cheaper than a credit card over a longer period or for larger amounts. The interest you’ll be charged might depend on your credit rating.
  • Often there’s a minimum loan amount (e.g £1,000) and duration (e.g one year).
  • You must make the monthly payments.
  • Not all personal loans charge a fixed rate so make sure you check.Find out more: Personal loans
I only want to borrow a small amount of money for a short period. Overdraft –
some current accounts offer interest-free overdrafts up to an agreed limit. Other accounts charge fees as well as interest.
  • Only if it’s authorised by the bank (otherwise you’ll be charged a very high interest rate and/or fees).
  • Your credit rating could be damaged if you borrow above your limit.
  • Not for longer-term borrowing as it can be very expensive and the bank can ask for repayment or reduce the overdraft limit at any time.Find out more: Overdrafts explained
I have existing debt I want to pay off as cheaply as possible. Balance transfer credit card –
some cards allow you to transfer your debts and pay no interest for up to two years. That means they can be a cheaper option for paying off other debts.
  • Most cards will charge a fee of around 3% on the balance transferred.
  • Know how you’ll pay back the amount before the 0% period ends (set up a Direct Debit to pay off regular amounts).
  • You might only qualify for a balance transfer card if you have a good credit rating.Find out more: Choosing and applying for a credit card
I want to deal with my debts as cheaply and simply as possible. Debt consolidation loans –
are available, but it;’s usually best to get free debt advice, to help out your finances.
  • Talk to one of the free, confidential and independent debt advice agencies to help you understand your options to managing your debt.
  • You might pay less each month, but loans can last much longer so you’d pay back more overall.
  • Don’t secure a debt consolidation loan against your home before taking independent financial advice.Find out more: Debt consolidation loans
I want to borrow but my bank won’t help. Credit unions –
if banks can’t help, a credit union could be an option. These not-for-profit organisations usually serve a particular community.
  • Run for and by their members and offer low cost loans (no more than 42.6% APR).
  • Only borrow if you can afford the repayments.Find out more: Borrowing from a credit union
I’m struggling to pay my debts and living costs but I can’t get any more credit. An interest-free loan from the Social Fund, or help from your local authority or the Scottish and Welsh governments –
if you’re on a low income and in real trouble, you might be eligible. You need to pay off as much of your debt as quickly as you can to try and bring it under control.
  • Seek help from a free debt adviser who can help you draw up a budget, deal with your creditors and see if you’re entitled to any extra benefits.
  • Don’t borrow to repay debts – you can end up trapped in a cycle of debt. Get help with your finances.Find out more: Social Fund loans

    Find out more: Help if you’re struggling with debt

Read the articles below to consider whether you really need to borrow money:

This article is provided by the Money Advice Service.

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