1. Why you want to borrow
It’s always good to have a clear idea of how you’ll use the funds. Is it for a single purchase like a holiday, or lots of little things like groceries? Or perhaps you just want a buffer for emergencies?
Making rules about how you’ll spend the money should help you manage it responsibly. It can also help you decide what type of credit is best for you.
Be honest with yourself about whether you really need to borrow money. It’s often better (and cheaper!) to wait and save up if you can.
2. How much you need to borrow
It’s smart to borrow only what you need. Extra cash has a funny way of burning a hole in pockets, and you don’t want to rack up debt over unnecessary purchases.
Try not to underestimate the costs you need to cover though, as you may find it difficult to increase your borrowing limit later.
3. Who you should borrow from
Think about whether you want to borrow from a company – like a bank or department store – or from a friend or relative. Both options have pros and cons, depending on your situation.
Borrowing money from someone you trust may be interest-free and flexible (i.e. they probably won't charge, and you might be able to skip a payment), but it can also put strain on your relationship.
Taking out credit from a company can help you avoid fallouts with friends and family. Just remember, you’ll normally pay interest or fees, and missing a payment can have harsher consequences.
If you decide to use a company, there’s the question of which one. Shopping around or using a comparison site can help you find a good deal, but you should always check that the lender is reputable.
4. What type of credit to get
There’s plenty of choice when it comes to credit, with common options including overdrafts, loans and credit cards.
It’s best to pick credit that suits your needs and financial situation. Get started by learning about the different kinds of credit and how they work.
5. How much it’ll cost
You’ll usually pay interest for using credit. Interest is calculated as a percentage of the amount you owe – this is called the interest rate.
To give a simple example: if you borrow £2,000 at a fixed rate of 10%, you’ll pay £200 in interest.
Bear in mind that a fixed rate will stay the same, while a variable rate can go up and down.
Some lenders charge fees instead of (or as well as) interest. If you want to compare products side by side, it’s helpful to look at the APR (Annual Percentage Rate). This takes into account interest and any mandatory charges. Typically, the lower the APR, the cheaper the product.
6. How much you can afford
Once you have an idea of how much you need and what it’ll cost, it’s time to see if you can afford the repayments.
A good place to start is your monthly income and outgoings. Your income is anything paid into your bank account, like a salary or student loan. Your outgoings are payments coming out of your account, like rent, bills and other living expenses.
Work out how much you’ll have left at the end of the month. Will it cover the repayments to your lender? If not, you risk racking up debt, which can be stressful and expensive.
It’s also sensible to think about how you’ll cope if something goes wrong. What if you lose your job, or your student loan is late? It’s important to avoid late payments, as this can lead to fines, a damaged credit score, and even legal action.
7. Your credit score
Bear in mind that each credit application you make will temporarily lower your credit score (whether you’re accepted or not). If you’re making multiple applications, try and spread them out over several months to reduce the damage.
Credit isn’t always bad for your score though. In fact, making full repayments to your lender on time should improve your score over the long term.