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