Credit—the ability to buy now and pay later—is a truly brilliant thing.
Without it, most of us would not own houses or cars and many of our
businesses would find it harder to grow and employ people. But credit
can also be a bad thing when it encourages people (and companies) to
borrow beyond their means and get into financial difficulties. In this
brief, handy guide, we take a quick look at credit, how to use it
effectively, and how to stay out of trouble.
This site is specifically about credit. For more general advice, please see
our companion site:
The Complete Financial Advice Guide.
Forget all those articles in the Sunday papers: everything you need is
here on the Web, if you know where
to look. To that end, we've compiled a list of over
100 of the best financial advice pages
we could find, covering everything from "What is a credit card?" to
"How do I fix probems with my credit report?".
Most of the pages linked here are not trying to sell you financial
products: they come from government departments, charities and nonprofits, trusted TV channels like the
BBC, and newspapers, and are offering genuinely impartial financial advice.
We've done our best to include several different guides to most topics,
so you can compare the advice and choose the approach you like best.
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Contents - what's on this page
What is credit?
The basic is idea is simple. You need to buy something, so you borrow
the money upfront and pay it back gradually in installments. The catch
is that you have to pay interest on the money you borrow to make it
worthwhile for someone to lend it to you in the first place. Credit
comes in all shapes and sizes, from credit cards (pieces of plastic
that let you make small purchases) to mortgages (large loans for buying
homes) and hire-purchase agreements (paying for something on an
installment plan). The best introductory guide to credit we've found
comes from the UK Citizen's Advice Bureau.
Useful links
Credit:
An excellent basic introduction from the UK Citizens Advice Bureau from
its superb Advice Guide website.- An
in-depth guide to credit: A good collection of advice from the BBC,
including how to get credit, what to do about lost and stolen credit
cards, and lots of information about your consumer rights.
- Credit Action: Help and
advice on all credit topics from the UK charity Credit Action: "We are
committed to helping people manage their money better. Our passion is
to help people stay in control, rather than let money control them and
disrupt their lives through over indebtedness."
- Consumer Handbook to Credit Protection Laws: Definitive advice from the US Federal Reserve Board. Subjects covered include the cost of credit, applying for credit, credit histories and records,
other aspects of using credit, electronic fund transfers, and filing a credit complaint.
- Credit:
A very basic, general guide from Wikipedia.
- Creditcards:
DIY guide for young adults: Advice on managing your money from
MasterCard.
- The
Truth About Credit: The flip-side of credit. The U.S. PIRG's Truth
About Credit Campaign aims to "put a stop to the out-of-control
marketing and unfair practices of the credit card industry, with a
focus on college campuses."
- Introduction
to credit: Smart Credit Tips explains the basic idea of credit and
credit cards.
- Consumer protection: credit: Lifehacker offers some wise tips from the front line.
- Your rights: Credit FAQs: Tips from the BBC, including advice on whether you can cancel a credit agreement, what protection you get from card companies if you buy faulty goods etc (UK site).
How does a credit card work?
When you apply for a credit card, you're getting more than a simple
piece of plastic. A credit card is really permission from a bank to run
up a debt of a certain size on the understanding that you'll pay it
back later. This is completely from a debit card, which simply charges
a payment to your bank account. With a debit card, you must have enough
money in your account to cover the entire purchase. A credit card is
more like a running overdraft or a small loan you don't have to apply
for. What you get with your card is a credit limit: the total amount of
money you can borrow at any one time. If your credit limit is $1000,
you can buy one item worth up to $1000 or 100 items worth $10 each.
Each month, your credit card company will send you a statement showing
how much you must repay (there is always a minimum amount) and how much
you have outstanding. If you pay the entire balance each month, usually
you pay no interest at all on the money you've borrowed. But if you pay
less and carry some debt over to the next month, the bank applies
interest to the outstanding balance. So it generally makes sense to pay
as much as you can, as soon as you can, so the amount of interest is as
small as possible.
Useful links
- Credit
cards made clear: Excellent introduction from the UK government's
Financial Services Authority.
- Choosing and using: APACS,
the UK payments association, offers this "free and impartial guide to
choosing a credit card and using a credit card. This simple guide has
been put together to help you understand how credit cards work, the
factors that you should consider when making your choice and the best
ways to use your card."
- Credit card:
A good all-round introduction to the mechanics of credit cards, including what all the number are for, how they are processed during a transaction, and some of the controversies surrounding their use.
- Credit card articles:
There are great articles on virtually every topic you can think of to
do with credit cards on this useful site from CardGuide.
- How credit
cards work: The nuts and bolts of the system explained by the
Howstuffworks website.
- Using Credit Wisely: This debt advice site for students gives good advice on how to use a credit card wisely.
What are the benefits and drawbacks of credit cards?
Most people would see credit cards as a good thing. Apart from their
ability to extend your spending power, credit cards generally offer
other benefits too. For example, if you buy travel tickets, you may get
free travel insurance; if you buy things over the Internet, you may
find you have protection against fraudulent transactions. You need to
check the terms and conditions of your card before you apply to see
exactly what benefits you will get.
But there are obvious drawbacks too. The biggest one is the ease with
which you can be given credit cards if you have a steady job and a
regular salary—and the temptation to borrow more than you can afford to
pay back. The other big problem is fraud. Now it's easy to make
purchases over the telephone or the Internet, it's relatively easy for
fraudsters to use someone's card without permission. The more
people you share your card number with, the bigger the risk you'll fall
victim to fraud of this kind. But even if you never make purchases of
this kind, there's still some risk.
Benefits
Drawbacks
- Buying on credit: options, pros, and cons: The UK government's direct.gov website sets out the benefits and risks of using credit cards, store cards, loans, and other types of credit.
- The
Truth About Credit: The flip-side of credit. The U.S. PIRG's Truth
About Credit Campaign aims to "put a stop to the out-of-control
marketing and unfair practices of the credit card industry, with a
focus on college campuses."
- Credit
card drawbacks: And just to complete the picture, Card Guide also
summarizes the bad points, including the temptation to get into debt
and the problems of fraud and theft.
- Drawbacks
of debit and credit cards: The bad points of using a credit and
debit cards to make business payments.
- Overindebtedness: The UK government's Department of Trade and Industry links to papers that describe initiatives from the British government to tackle the problem of growing personal debt.
How do you compare credit cards?
There are thousands of credit cards on offer, so how you do know which
one to choose? Most people compare credit cards using a measurement
called APR (Annual Percentage Rate). This gives you an indication of
how much interest you'll be charged, averaged over a period of one
year, on money you borrow with a particular card. Cards with higher APR rates will cost you more in interest
than cards with lower APRs, but there may be other benefits attached to
make those cards more attractive. Some cards are operated nominally on
behalf of charities or nonprofits so those organizations earn a small
percentage of whatever you spend. If you always pay back the entire
card balance at the end of each month, the APR is not all that
relevant—and factors like charitable donations may swing you to support
one card over another. Some cards charge an annual fee but offer a lower APR, so you
may need to do some calculations to find the cheapest deal.
Whoever issues the cards, they're usually associated with one of a
handful of major credit card organizations—the main ones being VISA and
Mastercard. It's important that your card is endorsed by an
organization like this or you might find it's not accepted when you
want to make a purchase.
General links
- Choosing and using: APACS,
the UK payments association, offers this "free and impartial guide to
choosing a credit card and using a credit card. This simple guide has
been put together to help you understand how credit cards work, the
factors that you should consider when making your choice and the best
ways to use your card."
- Choosing and Using Credit Cards: Shop around to get the best deal, according to this useful page from the US Government's Federal Trade Commission.
- Choosing a Credit Card: More independent advice from the US Federal Reserve Board.
- What is APR?: A good, clear explanation of APR and why it's not always as low as you may think.
- 5 major drawbacks of bad credit credit card: American Chronicle identifies five "features" of credit cards that you'll want to avoid.
Card comparison sites
Use online comparison sites to guide your decision in choosing a card, but do remember that some online card comparison sites will be getting a cut from the card issuers if they recommend you as a customer!
Credit reports and credit scores
If a bank is going to loan you money (with a credit card, an overdraft,
or some other form of loan), it needs to have a reasonable expectation
that you'll pay it back. So it will generally check out your
creditworthiness before agreeing to the arrangement. There are
specialist companies known as credit reference agencies who keep a file
on everyone who spends money. (The main ones are
Experian and Equifax,
but there are others including TransUnion (in the United States) and
Call Credit (in the UK).) Your file is called your credit record,
credit history, or credit report and it gives you a numeric score based
on your credit worthiness. All kinds of factors affect your credit
score. If you regularly borrow money and pay it back, that will
increase your score (make it better); if you've ever defaulted on a
payment or (worse still) been taken to court by a debtor, that will
severely impact your score. If you're registered to vote on the local
electoral roll, that will improve your score. A good record with your
bank will improve your score too. Generally, if you're good at
borrowing money and paying it back, you'll get a good score and people
will be pleased to lend you money (knowing they have a good prospect of
making money out of you).
In most countries, you can apply to see your credit record and you can
challenge any information you disagree with, but there is little you
can do about problems like bad debts or court judgements other than try
to stick to your payments in future. In the UK, the data protection act
gives you a legal right to apply for your credit report by paying just
£2 and sending your name, address, and other recent addresses to
the
credit agencies. All of them have websites offering instant,
higher-priced reports, but don't be fooled. Look around the websites
carefully for the section on "obtaining your statutory report" and fill
in the instructions. They then have seven working days to post the
details to you.
It's important to remember that credit agencies do not make decisions
about whether to lend you money: those decisions are made by the banks
and lending organizations. If you're turned down for credit by one
organization, it doesn't necessarily imply you will be turned down by
others. However, every credit check that's done on you will be listed
in your credit report and if you make many applications for credit in a
short period of time, that can itself adversely affect your credit
score. Generally, it is better to ask for quotations and informal
advice from organizations than to formally apply for credit until
you're absolutely sure you're ready.
Citizens' advice and consumer groups generally advise people against
using services provided by companies who purport to "repair" your
credit history. There's nothing these companies can do that you can't
do yourself. And usually they'll charge you lots of money for doing
very little.
General links
How do credit scores work?
- What is a credit score?: This introductory article from Experian's Credit Expert website tells you what credit scores are, how they're used, who uses them, and what factors can affect them.
- How credit scores work: Tips from the ever-excellent Howstuffworks website.
- What is credit scoring?: A basic introduction from the UK Financial Services Authority.
- Credit scoring: A simple introduction to how credit scores are worked out.
How to improve your credit report
Credit referencing agencies
Once again, be sure to look around these websites carefully to find the section where they let you order your free credit report. Don't be fooled into paying money for it; you really shouldn't need to.
Credit agreements and laws
If you're entering into a credit agreement, make sure you understand the terms clearly to begin with.
If you change your mind, you may be able to cancel the agreement later—but it depends how you made the agreement and when. Here are some pages that give you more detailed advice for the UK and US (other laws will apply elsewhere).
UK laws
US laws
Credit-card liabilities
Who pays if there's a problem with supplying goods you've ordered by
credit card?
Often, the credit card company is liable too—which is great news for
the consumer. This is another important benefit of paying for things by
credit card.
Useful links
- Liability
of credit card companies: A helpful guide from the BBC explains the
law in the UK (Section 75 Consumer Credit Act).
- Your rights: Credit FAQs: Tips from the BBC, including advice on whether you can cancel a credit agreement, what protection you get from card companies if you buy faulty goods etc (UK site).
- Debit card liabilities: This page from the US consumer protection group PIRG argues that debit cards carry much greater risks than credit cards.
Credit-card insurance
There are several different kinds of insurance you can take out on
credit cards. Some forms of insurance are designed to protect you by
helping you keep up repayments if your personal circumstances change
(for example, if you lose your job or become too ill to work). You can
also take out insurance to protect you against theft or fraudulent use
of your cards. Some of these insurance schemes make sense for some
people, some of the time. But don't sign up for them automatically!
Check what benefits you already get—it varies from country to country.
In the USA, the
Federal Trade Commission advises not to buy credit-card loss-protection insurance.
For example, when your bank sends you a new credit or debit card, it
may send you a leaflet offering insurance against theft and fraudulent
use of the card at the same time. But check the terms and conditions of
the card itself very carefully first. You may well find that there is
sufficient protection in the basic terms for you not to need additional
insurance. In the UK, providing you did not authorize use of your card,
your liability is usually limited to £50; in the USA, it is $50.
That amount of money may be less than a couple of year's premium for credit
and debit card insurance.
If you're worried about keeping up repayments in the event of your becoming sick
or losing your job, take a look at your existing insurance policies.
You may find that your main life insurance policy (if
you have one) will provide enough financial support to cover any credit
card obligations you may have without taking out additional, expensive
insurance. Remember that banks and financial organizations are
generally not interested in your well-being so much as your ability to
earn money for them. Don't fall for the sales patter if it's not in
your interest. If you're not sure where you stand, ask a relative, a
friend who's good with money, or an independent financial advisor.
Useful links
- Credit Card Loss Protection Offers: They're the Real Steal: Why you don't need credit card loss insurance, according to the US Government
Federal Trade Commission.
- 10
insurance policies you don't need: Today's Seniors lists credit
card insurance as a waste of money because, by law or through the terms
and conditions of the card issuers, most people are already covered
against most losses.
- Zero liability: According to VISA, its US-issued cards come with a "Zero Liability policy: your liability for unauthorized transactions is $0—you pay nothing".
Reporting lost or stolen cards
What should you do if your cards are lost or stolen? Phone you bank immediately, of course!
Don't worry if you lost that special helpline number they gave you: simply phone you bank's
ordinary number and they'll put you through to the right place.
Don't report credit card losses online: it takes too long to get your card cancelled that way.
Useful links
The identity fraud problem
We hear an awful lot about "identity fraud"—the idea that someone can "steal" your identity, using discarded documents (perhaps) to apply for credit cards, loans, or other financial arrangements, ultimately at your expense.
How can you minimize the risk of identity fraud when you use your credit or debit card?
Useful links
Making purchases more safely online
Many people worry about the security of their credit and debit card information when they shop online—and with good reason. Short of keeping your money under the mattress and paying for your goods by barter, what can you do to reduce the risk of fraudulent transactions costing you money?
Useful links
Merchants: how to process credit card payments online
You've started trading online and you suddenly realize: you need to be able to receive credit-card payments.
A few years ago, this used to be quite a tricky thing to organize. Now, thanks to online payment processing
services such as PayPal and Google Checkout, it's a cinch: anyone with a suitable account can accept
payments by credit or debit card. But what are the pitfalls and how do you avoid them?
You'll want to read up on the risk of online fraud and chargebacks (when card holders ask for a refund), both of
which can affect your profits.
If you have a business bank account, you could try asking your bank for advice.
Many banks now offer their own card-processing services to merchants.
Introductions
Minimizing fraud, chargebacks, and other risks
Online card processing services
Here are 10 examples of companies offering merchant services to businesses of all sizes. Google around for "online payment services for merchants" or "accept online payments merchants" and you'll find many more.
History of credit
If you find money a fascinating subject, you might find the history of
banking and credit interests you too. And there are some great sites
you can explore:
Useful links
- The History of Credit and Debt:
Steve Rhode delves back to ancient times to find out how, where, and
why the moneylenders began their business.
- The
Secret History of the Credit Card: A PBS special in which
"correspondent Lowell Bergman uncovers the techniques used by the
industry to earn record profits and get consumers to take on more debt".
Getting out of debt
Statistics
Are you researching money, economics, finance, or credit?
Here are links to pages of statistics you can use.
Useful links
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