Credit doesn’t have to be risky – here’s how to use it smartly

credit score concept on the screen of smartphone — It’s a good way to manage your money if you follow simple rules. (Credits: Getty Images)

Many of us are frightened of borrowing money, whether on a credit card or through a loan or mortgage, with a recent survey from comparison site Uswitch showing that a third of young people view credit cards as ‘potential debt traps’.

But used correctly, credit can help you to build your credit score, manage your cashflow and even end up with more money at the end of the month. Here’s how to make credit a friend, not a foe.

Assess yourself first

All of us need to know how we’re doing financially, so if you’re making a big purchase or need to borrow money, ask yourself first why you’re doing it and if you can afford it.

Remember, it’s normal to consider finance for big purchases such as houses or cars, with 9 in 10 cars requiring financing and only a third of homeowners not having a mortgage.

Many people also use credit for smaller purchases, for many reasons. Just make sure you go through your budget, understand what you can afford and what the payments will be.

Choose credit with low rates and benefits

Young woman doing online shopping with laptop sitting on the floor at home — There are potential benefits to taking out different types of credit which can help lessen the fear of using it (Credits: Getty Images)

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Understanding the benefits and rates of different types of credit will help you to be less scared of using it, and to set it up to your advantage. Potential benefits include:

Extra time: Credit cards and buy now pay later (BNPL) schemes don’t cost you anything in interest as long as you pay on time.
Reward points and cashback: There can be perks such as frequent flyer miles, Nectar points and cash.
Credit score building: All credit card providers, and some BNPL options such as Zilch, report your regular payments of debt to credit rating agencies. This means that if you pay back debt regularly to them, your credit score will increase, not decrease, because lenders can see you are responsible with money. Having a good credit score makes it easier to get mortgages and other deals.
Consumer protection: Credit cards and Zilch offer Section 75 protection, which means if you buy something over £100, the provider is also liable if a firm goes bust or goods are faulty.

Have a payment plan in place

Woman hand with pencil writing on calendar page — Having a plan to pay back any credit you’ve taken out means there should be no fear in using it (Credits: Getty Images)

Knowing you have a plan to pay back any credit you’ve taken out means there should be no fear factor in using it. That means keeping a diary record of when payments need to be made, putting aside money in a separate account or savings pot to make payments on BNPL schemes and setting up direct debits to pay off cards in full every month unless they have an interest-free period.

Always make the minimum  payment on any debt, as not doing so will ruin your credit rating and remove any interest-free period you have on a card.

Super-charge your savings

If you can get credit for a longer period and use that to spend, then your savings can stay in your account earning money for longer. This is a process known as ‘stoozing’ and it isn’t for everyone, but if you’re clever you can make money on your own cash while using credit for free.

If you’re doing this, make sure your own money is earning the highest interest possible (use Moneyfacts Compare to check the highest rates on cash savings) and always pay back your debt before any interest-free period ends.

Get help if you need it

Credit can be a powerful friend but  if you get into trouble with it, debt can cost you dearly. Charities such  as StepChange and Citizens Advice can help if you are struggling with debt.