So debt can be a really weird thing. People can be too credit avoidant or too far the other way and have a load of maxed out credit cards. There's a middle ground though, that's usually a happy medium. A little debt can even be a good thing sometimes. Andy Webb is with me and he's going to explain about how to use credit to get a little bit richer. Andy runs an award- winning blog called Be Clever With Your
Cash and he's also a fellow podcaster. He hosts a weekly show, Cash Chats. So let's see what he's got to say. So Andy, we're going to start off with credit. So explain to us what exactly is credit?
Credit is basically when you borrow money for different parts of spending. The most common one that we know about obviously is the credit card. It's got the word credit in it, hasn't it?
It does.
Right. That's what people think of as credit a lot of the time. And when you use a credit card, the spending that you do on that card, you are basically borrowing that cash. That money is being paid for by the credit card company and you are going to have to then pay it back and it's not just credit cards. So there's also things like your overdraft, that's also credit
loans, mortgages, which I'm sure we'll talk about again. Even things like your mobile phone contract, sometimes they are things where you're going to have to apply for this credit. Doesn't necessarily come out of nowhere, got to apply for it, and then you're going to have to ultimately then pay it this money back.
I think when it comes to credit, like you said, there's a lot of things that people don't realize is credit. I think phone contracts is a big one that whenever I talk about it with people are like, that's not credit I'm paying for my phone line. But it is a line of credit that you're applying for. So I think it's
always good to understand what that looks like. But whenever people talk about credit sometimes there can be a negative spin on it, right? But I want to switch it the other way. So why can it be a positive thing?
Yeah. Well, I mean I think it's important to sort of just touch on why people are a bit scared of it as well, aren't they? Why they think of it? Because this thing that comes into mind is that the debt that comes from it. Some people don't appreciate that it is when you borrow money, if you don't pay it back, it is a debt. And also the vast majority of the time, not always, the vast majority of the time,
credit isn't free and you are paying for it. So not only are you applying for the access to have this money that you can spend, but then there'll be extra added on most of the time. And so say you've got a hundred quid in your credit card with a 20% interest rate, then if you leave it as it is, you don't touch it, don't pay it off at all in that year, then it's going to cost you 20
quid. And obviously the more you borrow, the higher the interest rates, the longer you borrow for, the more expensive it gets. So understandably, yeah, people do think, " I just don't want to get into that situation." But it does assume that you aren't paying it off. And like you say, if you do pay off this debt a lot of time there are some benefits that can come with that.
Credit cards, for example, there's a thing called section 75 of the Consumer Credit Act, and this is a kind of a protection we get if you buy something that costs more than a hundred pounds but less than 30, 000 pounds and there are like Grey areas here, but broadly speaking, if you pay for that with a credit card rather than with a debit card, then if something was to go wrong, the credit card company is, this is
a law, right? They're legally liable to refund you if for some reason you can't get that money back from the people you originally bought it from. So that's a really, really good extra that you only get with credit. Another one may well be little perks like rewards or cash back that you can get when you spend with a credit card.
So it might not be a huge amount, maybe like 1% back, maybe less, maybe a little bit more every time you spend. But this is something which again, as long as you do clear that balance every single month, don't get charged that interest, can earn you a little bit extra cash. So sometimes there are benefits for using something like a credit card over a debit card. What else? It could be
that there's something that you can't normally afford, right? Mortgages. I know you talk about mortgages all the time. How many of us can just go out there and buy a house?
That's a massive amount, isn't it? That's a hefty amount.
Yeah. So you borrow for that one. Okay, yeah, you are going to pay an interest rate on that. You are going to pay more than the original value of the property, but otherwise you're never going to get on the property. So something that can mortgage, it's a credit, allows you to
buy those expensive things. And even something that's not just as massive as a mortgage, something much less expensive but still pricey in the short term, a holiday, a TV. It's things which could be quite expensive. You don't have enough money for right now, but you know will be able to afford it if you spread it out over
time. And sometimes you can do that at 0%. There are ways, not overdrafts, not percent credit cards, generally for a limited amount of time, but it can help you buy those expensive things and spread that cost out. But I would say one of the most important things that comes with credit, and this is a bit weird in itself, if you have credit, it helps you get credit.
I know, right?
Yeah.
That concept almost feels a bit foreign that that is the case, but it is, yeah. If you have credit and the reason is obviously because you are borrowing money and if you pay it back in a timely manner, then you're showing lenders that you're actually a responsible borrower.
So it's like " Okay, we're actually going to increase your limit because you've shown that the money we've given you thus far, you can borrow from us and pay back and we get our money back so we'll give you a bigger limit." But I think people don't really understand that concept and it is a bit foreign.
We'll talk about those risks and people worrying about debt. They think, " Oh no, I'm really scared of that. I don't want to be in that world." But if you don't enter any world of credit at all, when you do need to get credit, anything from that mobile phone contract through to a mortgage, you're going to find it harder to get it in the first place or you won't have access maybe to the cheaper deals, the better
deals. So it is a really weird thing whereby having credit, let's say a credit card that you use for your everyday spending, you don't get too carried away in but everyday spending and you manage it properly, you manage to pay it off, don't get charged the interest, you don't miss any payments, then that ultimately is a good thing and it'll help you longer term. It shouldn't be like this, but sadly it is.
But I love that breakdown. I feel like even you saying that it gives people the ability to spread the cost of payments. I think we're going to come into that in a second, but there's a lot of different things out there that allow you to spread the cost. But I think it is a good thing if you want to buy something, you say, " You know what? Especially you've got 0% interest credit card
overdraft," like you mentioned. Being able to spread that cost can alleviate some of that pressure that you've got financial stress and say, " Right, I'm going to plan it out for the next six months, plan out my finances and pay off this TV, this boiler I had to replace," or whatever it is. And now you've got kind of like
that comfort to fall back on, that comfort cushion. Okay, so we've covered how credit can be a very useful tool and there's a lot of positives to credit, but let's go to the other side. So what are some of the things that people need to be wary of
when it comes to credit? Because we have the standard tools that we're used to, we have credit cards, we have loans, but then you get to the checkout of things and you see other tools there like buy now, pay later, which has made credit a lot more accessible. So what are the things that people should be wary of when it comes to credit?
Yeah, I think the big one, and this is, which I think a lot of young people get caught out on when we first get access to credit, we don't necessarily
understand it. We think it's free money. We don't really understand the consequences of paying it back, don't necessarily understand the interest charges and then you quickly sort of start racking up the spending and you can't afford to pay off that spending and then you have to borrow more money to cover that the essentials, and meanwhile this debt's getting more expensive and it can spiral and it can get
very problematic. One in that how you just manage on a day- to- day basis, but two that knock on for the future and what it means for you later on, not just in your spending ability, but we talked about credit reports and you miss a payment or anything like that, then
that's going to knock your credit report. I know it's often easier said than done, but it's about making sure that you just spend within your means, you don't spend more than you can properly afford from your actual earnings or savings. Just because you've got a credit limit of two grand doesn't mean you've got two grand to spend. You've only got what's in your bank account that can
pay off that credit card. So that's one of the really big things to be concerned about there. I would say that there are times, particularly right now to where buy now pay later has made it really, really easy for this as well and people don't necessarily really appreciate the impact that has because it does work a little
bit differently. It doesn't necessarily, and this changes and depends on who you borrow from or buy now pay later impact your credit score in the short term. But that ability to have, oh, I've got one thing over three months, then you add another thing over three months and another thing it looks like small amounts but cumulatively all
add together and that gets a lot as well. So it's about even if you think you can afford something, just making sure you're keeping track of it as well.
Absolutely. I agree with you. I think what I love to always highlight is that no credit is bad. Credit is at tool, it's never inherently bad and that includes buy now, pay later, credit cards overdrafts. It's often the misuse of that credit or like you said, not planning, not figuring out how you're going to pay it back is where things can
sometimes go wrong. So as you said, it's just figuring out how are you going to do this, can you afford this? And if not, maybe you should skip buy now, pay later if you haven't figured out how you're going to pay it back. Maybe you should not spend on that credit card right now if you haven't got a means to pay it back. So I agree with you. We've touched on both sides
of the spectrum. We touched on how credit can be a powerful tool, really positive, and we touched on the other side and how it could have some complications. So when people are preparing to take out credit, how do people find that sweet spot between healthy credit that's good and can benefit your credit score and gives you opportunities such as you mentioned buying a house, buying property and
unhealthy that that could get out of control? So how do we find that sweet spot if you're going to take out credit?
Yeah, I think if you're starting off from scratch, right, you don't already have any sort of debts at all right now, then hopefully it's going to be an easier process for do as you said, just work out what you can afford. I think in terms of building up your credit report, building up your credit score, just do your everyday spending. It could be something like supermarket shopping
or petrol, whatever. It's things that you are going to spend money on anyway just to demonstrate that you can borrow money and then paying that off completely to avoid any interest charges. It's a great way just to start off with it. And just for that, just making sure there's maybe some money set aside in your normal current accounts
that is there to pay off those things. If you're already maybe in a bit of a situation where things are getting out of hand, it's just not to ignore
it. I know we say this all the time around any kind of debts, but it's so, so vital that the earlier you take action, the easier it's going to be for you to kind of get out of that mess and hopefully the other end start doing things in a way that we're going to be sort positively build your finances and your credit report and your wealth
and all these things. And that is a big part there is if you are struggling and it's kind of starting to get out of hand is, look, we said not all credit costs money. Some of it's free. And there are naught percent balance transfer credit cards, naught percent money transfer credit cards. These are really good products that if you apply for them and you're accepted for them, you can
transfer that debt over. There's often a fee, not always often like a small fee that's within it that you'll be charged on the balance you move over, but then your balance, that debt that's moved over is not getting charged interest for a certain amount of time and that gives you that ability to pull it down. You're not paying both what you owe and the interest, you're just paying
what you owe. Hopefully you can clear that a lot
faster. So that's a really good intermediate action. If things have gone even further and you kind of pass that and you're applying for these cards and you're getting rejected, I would say actually when you do apply for credit, often try and do what's called an eligibility search, first of all to give you an idea of how likely it is, it's never guaranteed, but how likely it's you'll get accepted
rather than just go straight into a full application. But if that's problematic, there are debt charities you can talk to, Step Change, Advice Bureau, National Debt Line, and they will help you work through how maybe you'll come out that other end.
Amazing. I think like you said, there's a lot of things to consider and credit should be seen as a tool, a useful tool, but we need to make sure that we're planning when it comes to using credit. So Andy, we've come to the point, I ask all of our guests what are the three tips that you can give our listeners to help them get a little bit richer?
So when it comes to credit, I think the first thing to do is to check your credit report and you can do this for free. It's not going to cost you any money. Actually three different credit reference agencies, which gets
a bit complicated, but check that credit report. So just to have a look at it, check for any mistakes or anything there that doesn't look quite right and that's a great thing to do. Then as we said, I would then get a credit card. I know somebody might find that a bit scary, but do that soft search, that eligibility search, see what you can get. Doesn't matter about
any fancy features. You just want any old credit card and you put your normal spending on it and you clear it every single month. That's the second thing that's going to really help you improve that credit score and give you that access to things later on. And finally, I would say what you want to be doing is making sure, this is so vital, that you do pay it every
single month. And there was a little hack for that very simple one. It's just setting up a direct debit for the full amount.
I agree with that Yeah. Absolutely. It's the best way. If you feel like you're going to forget or you don't want to miss that payment, you set up a direct debit, it's all set up for you. So I agree.
Just make sure you've got enough money in the current account to cover it. S
Make sure. Yeah.
And those three things, they're really going to help you put in a really good position for helping you use credit and get better access to credit in a few years time.
Amazing. Andy, this has been so useful. Packed full of gems, as always. So thank you so much for coming on and sharing all of that input on this episode. Next week, I want to talk about what it means to share money when you're living with someone. We'll be coming up with ways to manage these conversations and agree what works for you both. In the meantime, don't just
share your cash. Share this podcast too. Tell a mate, leave a review and help other people start getting a little bit richer. See you next week.