Today, borrowing is commonplace, with millions of people in the UK being in some kind of debt. And for the most part, that’s not always a bad thing – most debt is for large purchases such as houses and cars. Responsibly repaying these debts means that you own something of value, and there are many types of debt that can have a positive impact on your credit score, in turn increasing your future buying power. But before you take advantage of these positive benefits and borrow more money, it’s important that you understand whether the risks are worth it. Here are some questions to ask yourself before you borrow.
Bear in mind that both applying for and borrowing money can cause some damage to your credit score. The scope of the damage will depend on a number of factors, including how you handle the account and how much debt you are currently in. If you’re already utilising a large amount of debt, then adding more can harm your credit score, but on the other hand, diversifying it with a different type of loan and ensuring that you make timely payments can boost your score in the long run.
Whether you are applying for car finance, a new credit card or payday loans, one of the first questions that you should ask yourself is whether or not you are able to afford to repay the debt. Do some research to determine how much you will be required to repay every month, and factor this into your current expenses to make sure that your income is large enough to cover the payment comfortably. If you’ll struggle, the debt will be a liability to your credit history.
If you’re already repaying debts then adding more, particularly if you are going to max out the credit limit, it can have a negative impact on the calculations used to determine your credit score. For example, if you have £6,000 in available credit and you’re currently using £1,000, your credit utilisation will be 17%. But if you get another credit card with a limit of £2,000 and max it out, you’ll now have £8,000 available credit, of which you’re using £3,000 – leaving you with a credit utilisation of 37.5%, which could result in a lower credit score as it’s considered high.
You might be able to bypass all the issues of interest rates, credit score damage and minimum payments by borrowing money from family or friends instead, but before you ask a loved one if they would be willing to lend you money, ask yourself whether it is worth it. It’s a personal decision that you should weigh up very carefully – although a relative might not charge you interest or expect you to pay on time every month, if anything goes wrong it could put your relationship at risk.
Before you borrow any money, make sure that you’re asking these important questions!