Debt is a nasty fact of life, like taxes and death. Most of us can’t expect to buy a home or higher education without it and it’s a sad irony that steering well clear of all debt is likely to harm your chances of getting a loan when it really matters. We all have to build up a credit history and credit ratings agencies compile data on you so they can provide a picture of how “trustworthy” you are. This is so lenders can decide whether to give you credit and if so, how generous they ought to be in their terms.
Sometimes, their judgement as to whether you’re “reliable” is fair enough – bankruptcies or being in arrears are pretty good indicators that you might end up costing the lender (although seemingly won’t stop you being elected President of the United States…) But as for simple prejudices based on age, personal housing circumstances and marital status, it just goes to show that young people have an impossible time in their bid to be taken seriously by lenders, so they can do without borrowing mistakes that could be easily avoided. For instance, getting on the electoral register and keeping it updated, whatever your housing circumstances are, is a seemingly silly but really important hoop we all have to jump through.
There is a way to get debt right and a way to get it very wrong. Taking out small, manageable levels of debt for a specific purpose so you can pimp up your credit rating? A very good idea.
However, many of us find out about debt the hard way, induced to take out credit cards and overdrafts at a young age with little knowledge of how they really work. To paraphrase Samuel Johnson, we borrow in haste only to repent at leisure. More than a third of young people have debts of £3000 or more and say this “weighs them down”, according to recent research from the Money Advice Trust.
But if you know your APRs from your CCJs, you have every chance of getting the better of your debt, rather than the other way round. Often, young people slip up because they don’t understand the ridiculous jargon that accompanies it. So I put together this handy borrowing jargon-buster for giffgaff money and I want to share it with you as well; bookmark and thank me later.
Consolidated loan: Can be a lifeline. A large loan taken out to pay off a number of smaller loans or debts, so stretched borrowers can manage repayments better and get back on track. But it is promoted by high-interest lenders as well as responsible ones.
APR or APRC: The annual cost of your borrowing. It takes account of interest, fees, and frequency of payments, so enables you to compare different loans. But beware the Representative APR which is the rate used for advertising. It only has to be offered to 51 per cent of all customers accepted for a loan. What you need to know is your Personal Rate. The headline rate on personal loans may also only apply to higher amounts on offer, not lower ones. Remember too that a credit card APR will not show you the rate charged for cash, which will be higher.
Hire Purchase: The traditional ‘buy now pay later’ way to buy big-ticket items such as a TV, sofa or car. You pay monthly instalments, and until they end the finance company owns your prize possession.
Payday loan: Once seen as a last resort, this is the tempting way to bridge the gap to payday when your cash runs out, these days at the click of an app. But to borrow £200 for two weeks will typically cost you from £27 to £33.
Secured loan: Not your average loan, this is when you offer your car, or more likely your home, as security. It means the cost will be lower, though it may be a condition of being allowed to borrow. If you fall down on repayments, you stand to lose your wheels – or your roof.
Unsecured loan: Your typical loan, where the bank or other lender looks up your credit rating, sets your personal APR, and does not ask for any security.
Credit rating: This explains why loan customers are paying different rates. It’s all down to your personal credit score. Banks and all other lenders rate you on a points system, based on your history of borrowing and repaying, for better or worse. They share information, so there’s no escape.
Credit reference agency: These are the all-seeing spies who keep those credit records and release the information to lenders. When you apply for any loan or mortgage, an agency such as Experian or Equifax will be tapped for your credit report. You have the legal right to request a copy of the report, for a nominal fee.
Soft search: A credit application that tests the water on what sort of product or rate you might qualify for, without leaving a ‘footprint’ on your credit file.
Hard search: A credit application that shows up on your credit file, even if you don’t go ahead and were only curious about what might be on offer.