There are times when you may feel like you can’t get away from credit card and loan advertisers, offering no end of tempting deals. But behind the slogans, it can be difficult to work out whether a product is right for you.
Financial terminology is often confusing, so we’re going back to basics with an explanation of the key differences between debt and credit.
What is debt?‘Debt’ is the amount of money you owe on a mortgage, student loan, car finance deal, credit card or loan. Provided you can make the minimum monthly repayments, getting into debt is not necessarily a bad thing, especially if you are investing in your future with a new home or university education.
By paying on time and in full, you should be able to improve your credit score, which gives lenders the confidence to offer you better rates on everything from mortgages to mobile phone contracts. There are often other benefits to using a credit rather than debit card on purchases, with some offering cashback, air miles or supermarket reward points.
Unfortunately, ‘good’ debt can easily become unmanageable ‘bad’ debt, especially if your circumstances change suddenly due to unemployment, a relationship breakdown or illness. Debts may be considered ‘bad’ (also called ‘toxic’) if the high interest rates and fees make them almost difficult to pay off.
What is credit?Although closely linked to debt, ‘credit’ refers to the amount a provider is willing to lend you, up to an agreed limit. Your credit card may allow you to borrow up to £5,000 but if you’ve only spent half of that, you’ll have a debt of £2,500 and then the same again in additional credit.
Unsecured credit – which includes credit cards and personal loans – means a lender cannot take your home or property for non-payment, but must instead recover their money via bailiffs, the courts or an agreed plan. This is different to mortgages and car finance, where the loan is secured against the property or vehicle and could be repossessed if you fall behind.
As the person who owes money, you are called the ‘debtor’ while the lender is known as the ‘creditor’, which is useful to know when talking about your finances or embarking on a repayment plan.
If you are struggling to stay on top of your debts, and would like free and confidential advice, contact a member of the PayPlan team here.
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