Buying on Credit

Credit and store cards are a form of borrowing. There are certain situations where they can be useful – for instance, credit cards sometimes offer you extra protection when buying goods – but like any other form of borrowing they should be treated with caution and before you spend any money you need to be sure you will be able to pay it back when you need to.

Buying on credit also includes arrangements such as hire purchase and ‘buy now pay later’ credit deals. These can seem a tempting option, particularly when you don’t have the money available to pay for what you need up front. Again, you do need to think about the long term costs of this sort of borrowing.

Credit Cards

You can apply for a credit card from your bank and other providers. They will run a credit check on you to help them decide whether to offer you a card and what your credit limit should be, if you have had debt problems in the past you may find it difficult to get a credit card.

Credit cards can be useful in many ways. One of the reasons of looking into getting a card is the added protection they can provide. When you make a purchase costing between £100-£30,000 using your card, the card company as well as the person you are buying from is held responsible if anything goes wrong, and you may be able to get your money back from the card company under certain circumstances. This can be useful if, for example, the company you were buying from has shut down. There are exceptions to this – check the details with your card supplier first to make sure you will definitely be covered.

It’s really important that you keep track of whatever you spend on your credit card as you will have to pay it all off at the end of the month to avoid being charged interest. The card company will normally only insist that you make a ‘minimum repayment’ on what you owe but in practice it’s a good idea to pay more than this. You will continue to be charged interest on anything you don’t pay off and it may take you a very long time to clear the balance if you only ever make the minimum repayment, making this a very expensive method of borrowing. Some companies also charge you just for having the card – beware of this when signing up.

The rate of interest you will have to pay on any outstanding balance will vary depending on which credit card you have so it’s worth shopping around before you make your final choice. Some may offer an introductory rate which could be as low as 0%, but then go up to a higher rate after you’ve had the card a while. If you decide to get a card with a deal like this attached, make sure you know when the rate will increase so you can switch your borrowing to a different card. This is called a balance transfer and you may incur a fee – check with your card issuer.

Your credit card may offer other features such as allowing you to withdraw money from a cash machine, again you will usually have to pay a fee and will often have to pay interest on the money from the moment you withdraw it. This may be a higher rate of interest than you have to pay on usual purchases. Taking all this into account, withdrawing cash using your card can be a very expensive way to use it, and is generally best avoided.

Store Cards

These are different to credit cards – they are offered by shops in the high street rather than banks, and you can usually only use them in that shop and others which are part of the same chain. Other features are similar to credit cards – you will have to undergo a credit check before you are given a store card and you must pay off the balance at the end of the month to avoid paying interest. Store cards offer introductory discounts when you sign up, so might be worth using them for a big purchase, as long as you can afford to pay off the balance straight away.

Hire Purchase

Buying on hire purchase usually means you can take the item away with you immediately and then pay for it in small amounts either weekly or monthly over a set period. It can be easier to get credit this way than if you go through a bank or other credit provider.

It’s also worth remembering that you will not actually own the goods until you’ve paid off the full amount, and so you will be liable for any damage that may be caused to them while in your possession. You may also have to pay an added fee in order to eventually own the goods, on top of the payments you have already made. This can be a lot, so it’s worth checking to see where you stand before you sign up.

As with any financial product, you should shop around before you buy and make sure you read the small print. Some contracts state that if you break the agreement you will be liable for an excessive charge, or if you miss a payment you are at risk of losing the goods but will still be liable for the full amount you owe the lender. Make sure you find out whether you will have to pay any extra at the end of your agreement in order to own the goods, what happens if you miss a payment and what your cancellation rights are.

You may be offered insurance with your hire purchase agreement. Think about whether you really need this and if you could get a better deal elsewhere.

Catalogues

Buying on credit from a catalogue can allow you to have items delivered to your door and spread the cost over several weeks or months. Some catalogues allow you to do this interest-free, always check what happens if you miss a payment as charges may be enforced. For those that do charge interest, check the APR they offer – this might be quite high compared to loan or credit card rates which makes this an expensive way to borrow money. The price you pay for catalogue goods will usually be higher than you pay for the same goods from a high street store. Catalogues can be convenient, but they are generally an expensive way to shop.