Credit cards, credit ratings and debt

When used in the right way, credit cards can be a very useful source of additional funds. However, it is important to remember that they are a form of credit – which means that when you use your credit card, you are taking on debt… and if you fail to repay this debt as agreed, it can have an adverse effect on your credit rating, among other things. For people who want the convenience of using a card to make purchases, but don’t want to risk falling into debt and damaging their credit rating – there are prepaid cards. Prepaid cards allow you to preload money onto them, and only allow you to spend the amount you have loaded on. Some people see prepaid cards as suitable alternatives to credit and debit cards, because they can be used in similar ways, but offer a more ‘controlled’ way of spending money. Because you are not allowed to spend over the amount that is loaded onto your card, prepaid cards can help to protect your credit rating. If you use a ‘standard’ credit card, you are spending money you don’t yet have – and will be required to repay some of it at the end of the month. If you fail to make the minimum payment at the end of the month, this will be noted on your credit report for other lenders to see. However, if you are using a prepaid card, you will have already loaded your money onto it, so you don’t have to worry about having to pay the bill when the month draws to a close – and therefore cannot miss any payments. If you find that you are having to take on debt each month to afford your living costs, it probably means that you are over-reliant on credit. So, to reduce your reliance on credit, you could – as well as thinking about using a prepaid card – improve the way you manage your finances. For example, you could: Draw up a budget and plan out what you need to buy for the month. Then work out how much your essential expenses will cost you. This will allow you to see exactly how much money you will need for the entire month. Now you know how much are going to spend, you can try to make sure this money is set aside so you don’t actually need to access credit to cover your costs. If you do find yourself having to tackle debt – because you’ve been over-reliant on credit, for example – you may want to take a look at the following useful resources: www.ThinkMoney.com/debt/ – Think Money provide advice and information on a variety of different debt problems in the UK.