Deciding on the best type of credit for you

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When you’re borrowing money, it’s important to understand how much the different options cost and how they work. You also need to know how those costs vary depending on the amount you’re borrowing and for how long.

What’s the best credit option for you?

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Reason you need to borrow Consider Top tips

I want to buy something on credit and have some flexibility in how I can pay it back. Credit card
Some have 0% deals on purchases over an introductory period (of between 3 and 30 months).
  • You should pay off as much as you can to avoid or minimise any interest payments.
  • If you’re using a 0% deal, make sure you pay it back within the interest free period.
  • Cards charge from around 22% interest or more when the introductory offer finishes.
  • Set up a Direct Debit to make sure you don’t miss a payment.
  • Don’t borrow more than you need.
  • If you’ve got a poor credit record you might be offered a shorter 0% period than the one advertised, a higher rate of interest when the 0% period ends, or be turned down altogether.
  • Some cards charge a monthly or annual fee.
I have existing debt I want to pay off as cheaply as possible Balance transfer or money transfer credit card
Some cards allow you to transfer your debts and pay no interest for up to 18 months. They can be a cheaper option for paying off other debts.
  • Most cards will charge a fee of around 2-4% of the balance transferred.
  • Know how you’ll pay back the amount before the 0% period ends (set up a Direct Debit to pay off regular amounts).
  • You might only qualify for a balance transfer card if you have a regular income.
  • A money transfer card allows you to pay money straight into your bank account for a fee. You can use this cash to pay off other debts.

Find out more:
I want to borrow some money but pay back a fixed amount every month. Personal loan
Might be cheaper than a credit card over a longer period or for larger amounts. The interest you’ll be charged will depend on your credit rating.
  • There’s often a minimum loan amount (eg £1,000) and duration (eg one year).
  • You must make the monthly payments.
  • Not all personal loans charge a fixed interest rate, so make sure you check.
I only want to borrow a small amount of money for a short period. Overdraft
Some current accounts offer a £100 to £250 interest-free overdraft up to an agreed limit.
  • Interest rates on overdrafts can typically be around 40%, so other forms of borrowing are likely to be cheaper.
  • Your credit rating could be damaged if you borrow above your authorised overdraft limit.
  • Not for longer-term borrowing as it can be very expensive and the bank can ask for repayment or reduce the overdraft limit at any time.

Find out more:
I want to deal with my debts as cheaply and simply as possible Debt consolidation loans
Might be available depending on your circumstances. But if you’re struggling financially, it might be best to get free debt advice before taking out such a loan.
  • You might pay less each month, but loans can last much longer so you’d pay back more overall.
  • If you’re having financial difficulties, talk to one of the free, confidential and independent debt advice agencies to help you understand your options for managing your debt.

Find out more:
Where can I get a loan of between £100 and £1,000 if I have a low credit score? Credit unions

Credit Unions are not-for-profit organisations that usually serve a local community or workforce. Run for and by their members, credit unions offer loans with an interest rate cap and also help people to save. Many will also offer additional services like guidance on benefits and other financial assistance.

 

Community Development Finance Institutions (CDFIs)

CDFIs, also known as responsible finance providers, offer fast and flexible credit to those who can afford to repay and usually serve the whole of the UK through online lending. Some will also offer additional services like benefits entitlement checkers and access to money management apps.

 

 
  • These organisations offer a personalised service for a range of people, including those who might struggle to get a loan from their bank.  
  • They tend to offer other support services in addition to loans, including help with benefits entitlement, savings and budgeting.
  • Only borrow if you can afford the repayments.

Find out more:
I’m living on benefits and/or struggling to pay my debts and living costs but I can’t get any more credit. An interest-free loan you pay back from your benefits or help from your local authority (or the Scottish and Welsh governments)
  • If you’re claiming benefits, you might be able to apply for an interest-free Budgeting Loan or a Budgeting Advance.
  • Get help from a free debt adviser. They can help you draw up a budget, deal with your creditors and see if you’re entitled to any extra benefits.
  • Don’t borrow to repay debts – you can end up trapped in a cycle of debt. Get help with your finances.

Find out more:

Is your household income getting squeezed?

If you’re facing higher living costs, but have little or no extra money coming in, find out about extra sources of income and support available to help you manage your household bills and save money in our guide Living on a squeezed income

Beware of loan sharks

Loan sharks often use online channels like social media to try and lend to people. This kind of lending is illegal and it could cost you a lot more than you think. 

Find out more about loan sharks and how to spot them