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The sensible use of debt can be part of a sound financial strategy. Debt can enable you to enjoy things that otherwise are currently beyond your reach, providing of course you manage your debt arrangements carefully.

Whilst borrowing costs money, this is not always a bad thing. It just means that when you pay it back, you will probably have to pay more than you borrowed unless you have an interest-free arrangement.

So before you borrow, consider your options carefully. Decide how much you wish to borrow, understand your reasons for borrowing, and make sure you fully understand and can manage your repayment responsibilities.

From time to time, review your debt and look at alternative options, such as re-mortgaging or moving a credit card balance that may make your repayments cheaper or more affordable.

There are many different borrowing options - overdrafts, mortgages, store cards, credit cards and personal loans are the main options. Some come with a structured plan to pay them back, while others are more flexible.

When deciding to borrow money, try to match your reason for borrowing to the right kind of credit. The three core considerations are:

The APR (Annual Percentage Rate)

The APR includes the interest rate plus any annual or set-up fees associated with the money you’ve borrowed, giving you the total annual charge you’ll have to pay for your credit. It doesn’t include additional charges such as fees for early or late repayment.

They vary widely - from low single figures – say 2-5% for mortgages - up to 25% or more for some credit cards and store cards. Short-term “payday loans” can have APRs of 300% or more.

The amount of the monthly repayment
Do consider carefully how much you can afford to pay back every month. Don’t forget those unexpected costs that arise usually when we can least afford them such as car repairs or a school trip.

The total amount you’ll pay back
When assessing how much you can afford to repay, don’t just take the option with the lowest monthly payments: consider too the amount you’ll have to repay in total and the repayment period.

THE IMPORTANCE OF BORROWING SENSIBLY


If you don’t keep up your repayments on money you’ve borrowed, it can affect your credit rating. This could make it difficult to borrow money in the future, even if you’re financially secure at the time. Being financially linked with someone with a bad credit rating can affect your rating too.

Different lenders use credit ratings in different ways, so it might be worth trying another lender if you’re turned down by the first. However be aware that too many credit checks in a short period of time can also have a negative effect on your score.

CHECKING YOUR CREDIT RATING


If any of the information about you is incorrect, you can ask the agency to change it. Credit Reference Agencies don’t decide if you can borrow money: their customers are the lenders, so they want information that’s as accurate as possible.
Work out carefully just how much you need to borrow and how you’ll pay it back - don’t be tempted to round up your income.

Try to minimise the total amount you’ll repay over the life of the loan - this often means choosing a shorter loan period with higher regular payments.

Make sure you can afford regular loan repayments with a bit to spare - missing a payment could affect your future credit rating.

Do make sure there are no errors or mistakes on your credit history that could affect what you can borrow by asking for your credit report from one of the key providers of this service:
experian.co.uk
equifax.com
callcredit.co.uk

noddle.co.uk
clearscore.com

If for any reason you are having trouble making your loan or mortgage repayments, do get in touch straightaway with your loan or mortgage lender, who will acknowledge your difficulties and may be able to help. They might allow a short term payment holiday or be able to extend the term of your loan to reduce the monthly payments due. Each case will be treated differently, depending on circumstances, so it’s important to find out what help you can get.

In addition, there are also many agencies and charities that can advise, including StepChange; National Debtline; and Citizens Advice.

Family Building Society
Ebbisham House
30 Church Street
Epsom
Surrey KT17 4NL
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