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Transcript

How To Keep Your Credit Healthy · A Little Bit Richer

• 0:01
  Host: So debt can be a really weird thing. People can
• 0:03
  Host: be too credit avoidant or too far the other way
• 0:06
  Host: and have a load of maxed out credit cards. There's
• 0:09
  Host: a middle ground though, that's usually a happy medium. A
• 0:11
  Host: little debt can even be a good thing sometimes. Andy
• 0:14
  Host: Webb is with me and he's going to explain about
• 0:16
  Host: how to use credit to get a little bit richer. Andy
• 0:19
  Host: runs an award- winning blog called Be Clever With Your
• 0:21
  Host: Cash and he's also a fellow podcaster. He hosts a
• 0:24
  Host: weekly show, Cash Chats. So let's see what he's got
• 0:27
  Host: to say. So Andy, we're going to start off with
• 0:32
  Host: credit. So explain to us what exactly is credit?
• 0:36
  Andy: Credit is basically when you borrow money for different parts
• 0:39
  Andy: of spending. The most common one that we know about
• 0:41
  Andy: obviously is the credit card. It's got the word credit
• 0:43
  Andy: in it, hasn't it?
• 0:43
  Host: It does.
• 0:44
  Andy: Right. That's what people think of as credit a lot
• 0:46
  Andy: of the time. And when you use a credit card,
• 0:49
  Andy: the spending that you do on that card, you are
• 0:51
  Andy: basically borrowing that cash. That money is being paid for
• 0:55
  Andy: by the credit card company and you are going to have to
• 0:57
  Andy: then pay it back and it's not just credit cards.
• 1:00
  Andy: So there's also things like your overdraft, that's also credit
• 1:04
  Andy: loans, mortgages, which I'm sure we'll talk about again. Even
• 1:07
  Andy: things like your mobile phone contract, sometimes they are things
• 1:10
  Andy: where you're going to have to apply for this credit. Doesn't necessarily
• 1:13
  Andy: come out of nowhere, got to apply for it, and
• 1:16
  Andy: then you're going to have to ultimately then pay it
• 1:18
  Andy: this money back.
• 1:19
  Host: I think when it comes to credit, like you said,
• 1:20
  Host: there's a lot of things that people don't realize is
• 1:22
  Host: credit. I think phone contracts is a big one that
• 1:25
  Host: whenever I talk about it with people are like, that's not credit
• 1:28
  Host: I'm paying for my phone line. But it is a
• 1:29
  Host: line of credit that you're applying for. So I think it's
• 1:31
  Host: always good to understand what that looks like. But whenever
• 1:34
  Host: people talk about credit sometimes there can be a negative
• 1:38
  Host: spin on it, right? But I want to switch it the other
• 1:41
  Host: way. So why can it be a positive thing?
• 1:43
  Andy: Yeah. Well, I mean I think it's important to sort
• 1:45
  Andy: of just touch on why people are a bit scared
• 1:46
  Andy: of it as well, aren't they? Why they think of it? Because
• 1:47
  Andy: this thing that comes into mind is that the debt
• 1:49
  Andy: that comes from it. Some people don't appreciate that it is
• 1:52
  Andy: when you borrow money, if you don't pay it back,
• 1:54
  Andy: it is a debt. And also the vast majority of
• 1:57
  Andy: the time, not always, the vast majority of the time,
• 2:00
  Andy: credit isn't free and you are paying for it. So
• 2:03
  Andy: not only are you applying for the access to have
• 2:06
  Andy: this money that you can spend, but then there'll be
• 2:08
  Andy: extra added on most of the time. And so say
• 2:11
  Andy: you've got a hundred quid in your credit card with
• 2:12
  Andy: a 20% interest rate, then if you leave it as
• 2:16
  Andy: it is, you don't touch it, don't pay it off at all
• 2:18
  Andy: in that year, then it's going to cost you 20
• 2:20
  Andy: quid. And obviously the more you borrow, the higher the
• 2:22
  Andy: interest rates, the longer you borrow for, the more expensive
• 2:25
  Andy: it gets. So understandably, yeah, people do think, " I just
• 2:27
  Andy: don't want to get into that situation." But it does
• 2:30
  Andy: assume that you aren't paying it off. And like you say,
• 2:33
  Andy: if you do pay off this debt a lot of
• 2:36
  Andy: time there are some benefits that can come with that.
• 2:39
  Andy: Credit cards, for example, there's a thing called section 75
• 2:41
  Andy: of the Consumer Credit Act, and this is a kind
• 2:44
  Andy: of a protection we get if you buy something that
• 2:45
  Andy: costs more than a hundred pounds but less than 30, 000
• 2:48
  Andy: pounds and there are like Grey areas here, but broadly
• 2:50
  Andy: speaking, if you pay for that with a credit card
• 2:52
  Andy: rather than with a debit card, then if something was
• 2:55
  Andy: to go wrong, the credit card company is, this is
• 2:57
  Andy: a law, right? They're legally liable to refund you if
• 3:01
  Andy: for some reason you can't get that money back from
• 3:03
  Andy: the people you originally bought it from. So that's a
• 3:05
  Andy: really, really good extra that you only get with credit.
• 3:08
  Andy: Another one may well be little perks like rewards or
• 3:11
  Andy: cash back that you can get when you spend with a credit card.
• 3:14
  Andy: So it might not be a huge amount, maybe like
• 3:15
  Andy: 1% back, maybe less, maybe a little bit more every time
• 3:18
  Andy: you spend. But this is something which again, as long
• 3:20
  Andy: as you do clear that balance every single month, don't
• 3:23
  Andy: get charged that interest, can earn you a little bit extra
• 3:25
  Andy: cash. So sometimes there are benefits for using something like a credit
• 3:29
  Andy: card over a debit card. What else? It could be
• 3:32
  Andy: that there's something that you can't normally afford, right? Mortgages.
• 3:35
  Andy: I know you talk about mortgages all the time. How
• 3:37
  Andy: many of us can just go out there and buy
• 3:40
  Andy: a house?
• 3:41
  Host: That's a massive amount, isn't it? That's a hefty amount.
• 3:43
  Andy: Yeah. So you borrow for that one. Okay, yeah, you are
• 3:46
  Andy: going to pay an interest rate on that. You are
• 3:47
  Andy: going to pay more than the original value of the
• 3:50
  Andy: property, but otherwise you're never going to get on the
• 3:52
  Andy: property. So something that can mortgage, it's a credit, allows you to
• 3:55
  Andy: buy those expensive things. And even something that's not just
• 3:57
  Andy: as massive as a mortgage, something much less expensive but
• 4:00
  Andy: still pricey in the short term, a holiday, a TV.
• 4:04
  Andy: It's things which could be quite expensive. You don't have
• 4:05
  Andy: enough money for right now, but you know will be
• 4:07
  Andy: able to afford it if you spread it out over
• 4:10
  Andy: time. And sometimes you can do that at 0%. There
• 4:12
  Andy: are ways, not overdrafts, not percent credit cards, generally for
• 4:16
  Andy: a limited amount of time, but it can help you buy those
• 4:18
  Andy: expensive things and spread that cost out. But I would say one of the most
• 4:21
  Andy: important things that comes with credit, and this is a bit weird in
• 4:23
  Andy: itself, if you have credit, it helps you get credit.
• 4:27
  Host: I know, right?
• 4:28
  Andy: Yeah.
• 4:28
  Host: That concept almost feels a bit foreign that that is
• 4:31
  Host: the case, but it is, yeah. If you have credit
• 4:34
  Host: and the reason is obviously because you are borrowing money
• 4:37
  Host: and if you pay it back in a timely manner,
• 4:39
  Host: then you're showing lenders that you're actually a responsible borrower.
• 4:42
  Host: So it's like " Okay, we're actually going to increase your
• 4:44
  Host: limit because you've shown that the money we've given you
• 4:46
  Host: thus far, you can borrow from us and pay back
• 4:49
  Host: and we get our money back so we'll give you
• 4:50
  Host: a bigger limit." But I think people don't really understand
• 4:53
  Host: that concept and it is a bit foreign.
• 4:56
  Andy: We'll talk about those risks and people worrying about debt.
• 4:58
  Andy: They think, " Oh no, I'm really scared of that. I
• 4:59
  Andy: don't want to be in that world." But if you
• 5:00
  Andy: don't enter any world of credit at all, when you
• 5:03
  Andy: do need to get credit, anything from that mobile phone
• 5:06
  Andy: contract through to a mortgage, you're going to find it
• 5:09
  Andy: harder to get it in the first place or you
• 5:11
  Andy: won't have access maybe to the cheaper deals, the better
• 5:13
  Andy: deals. So it is a really weird thing whereby having credit, let's
• 5:18
  Andy: say a credit card that you use for your everyday
• 5:20
  Andy: spending, you don't get too carried away in but everyday
• 5:23
  Andy: spending and you manage it properly, you manage to pay it
• 5:26
  Andy: off, don't get charged the interest, you don't miss any
• 5:28
  Andy: payments, then that ultimately is a good thing and it'll
• 5:31
  Andy: help you longer term. It shouldn't be like this, but
• 5:34
  Andy: sadly it is.
• 5:35
  Host: But I love that breakdown. I feel like even you
• 5:37
  Host: saying that it gives people the ability to spread the cost of payments. I
• 5:40
  Host: think we're going to come into that in a second,
• 5:43
  Host: but there's a lot of different things out there that
• 5:45
  Host: allow you to spread the cost. But I think it is
• 5:47
  Host: a good thing if you want to buy something, you say, "
• 5:48
  Host: You know what? Especially you've got 0% interest credit card
• 5:51
  Host: overdraft," like you mentioned. Being able to spread that cost
• 5:54
  Host: can alleviate some of that pressure that you've got financial
• 5:55
  Host: stress and say, " Right, I'm going to plan it out for
• 5:57
  Host: the next six months, plan out my finances and pay
• 5:59
  Host: off this TV, this boiler I had to replace," or
• 6:01
  Host: whatever it is. And now you've got kind of like
• 6:04
  Host: that comfort to fall back on, that comfort cushion. Okay,
• 6:06
  Host: so we've covered how credit can be a very useful
• 6:09
  Host: tool and there's a lot of positives to credit, but
• 6:12
  Host: let's go to the other side. So what are some
• 6:14
  Host: of the things that people need to be wary of
• 6:16
  Host: when it comes to credit? Because we have the standard
• 6:20
  Host: tools that we're used to, we have credit cards, we have
• 6:22
  Host: loans, but then you get to the checkout of things
• 6:25
  Host: and you see other tools there like buy now, pay
• 6:27
  Host: later, which has made credit a lot more accessible. So
• 6:30
  Host: what are the things that people should be wary of
• 6:31
  Host: when it comes to credit?
• 6:32
  Andy: Yeah, I think the big one, and this is, which
• 6:35
  Andy: I think a lot of young people get caught out on
• 6:36
  Andy: when we first get access to credit, we don't necessarily
• 6:39
  Andy: understand it. We think it's free money. We don't really
• 6:41
  Andy: understand the consequences of paying it back, don't necessarily understand the
• 6:44
  Andy: interest charges and then you quickly sort of start racking
• 6:48
  Andy: up the spending and you can't afford to pay off
• 6:50
  Andy: that spending and then you have to borrow more money
• 6:53
  Andy: to cover that the essentials, and meanwhile this debt's getting
• 6:56
  Andy: more expensive and it can spiral and it can get
• 6:59
  Andy: very problematic. One in that how you just manage on a day- to-
• 7:01
  Andy: day basis, but two that knock on for the future
• 7:03
  Andy: and what it means for you later on, not just
• 7:06
  Andy: in your spending ability, but we talked about credit reports
• 7:08
  Andy: and you miss a payment or anything like that, then
• 7:11
  Andy: that's going to knock your credit report. I know it's
• 7:15
  Andy: often easier said than done, but it's about making sure
• 7:18
  Andy: that you just spend within your means, you don't spend
• 7:21
  Andy: more than you can properly afford from your actual earnings
• 7:25
  Andy: or savings. Just because you've got a credit limit of
• 7:28
  Andy: two grand doesn't mean you've got two grand to spend.
• 7:30
  Andy: You've only got what's in your bank account that can
• 7:31
  Andy: pay off that credit card. So that's one of the
• 7:33
  Andy: really big things to be concerned about there. I would
• 7:36
  Andy: say that there are times, particularly right now to where
• 7:39
  Andy: buy now pay later has made it really, really easy
• 7:41
  Andy: for this as well and people don't necessarily really appreciate
• 7:43
  Andy: the impact that has because it does work a little
• 7:45
  Andy: bit differently. It doesn't necessarily, and this changes and depends
• 7:49
  Andy: on who you borrow from or buy now pay later
• 7:51
  Andy: impact your credit score in the short term. But that
• 7:53
  Andy: ability to have, oh, I've got one thing over three
• 7:56
  Andy: months, then you add another thing over three months and
• 7:58
  Andy: another thing it looks like small amounts but cumulatively all
• 8:00
  Andy: add together and that gets a lot as well. So
• 8:02
  Andy: it's about even if you think you can afford something,
• 8:05
  Andy: just making sure you're keeping track of it as well.
• 8:07
  Host: Absolutely. I agree with you. I think what I love
• 8:10
  Host: to always highlight is that no credit is bad. Credit
• 8:14
  Host: is at tool, it's never inherently bad and that includes buy now, pay
• 8:16
  Host: later, credit cards overdrafts. It's often the misuse of that
• 8:20
  Host: credit or like you said, not planning, not figuring out
• 8:23
  Host: how you're going to pay it back is where things can
• 8:25
  Host: sometimes go wrong. So as you said, it's just figuring
• 8:28
  Host: out how are you going to do this, can you afford
• 8:30
  Host: this? And if not, maybe you should skip buy now,
• 8:32
  Host: pay later if you haven't figured out how you're going to
• 8:34
  Host: pay it back. Maybe you should not spend on that credit card right
• 8:37
  Host: now if you haven't got a means to pay it back.
• 8:38
  Host: So I agree with you. We've touched on both sides
• 8:42
  Host: of the spectrum. We touched on how credit can be
• 8:44
  Host: a powerful tool, really positive, and we touched on the
• 8:46
  Host: other side and how it could have some complications. So
• 8:50
  Host: when people are preparing to take out credit, how do
• 8:53
  Host: people find that sweet spot between healthy credit that's good
• 8:58
  Host: and can benefit your credit score and gives you opportunities
• 9:00
  Host: such as you mentioned buying a house, buying property and
• 9:04
  Host: unhealthy that that could get out of control? So how
• 9:06
  Host: do we find that sweet spot if you're going to
• 9:08
  Host: take out credit?
• 9:09
  Andy: Yeah, I think if you're starting off from scratch, right,
• 9:12
  Andy: you don't already have any sort of debts at all
• 9:14
  Andy: right now, then hopefully it's going to be an easier
• 9:16
  Andy: process for do as you said, just work out what
• 9:18
  Andy: you can afford. I think in terms of building up
• 9:21
  Andy: your credit report, building up your credit score, just do
• 9:24
  Andy: your everyday spending. It could be something like supermarket shopping
• 9:27
  Andy: or petrol, whatever. It's things that you are going to spend
• 9:29
  Andy: money on anyway just to demonstrate that you can borrow
• 9:33
  Andy: money and then paying that off completely to avoid any
• 9:35
  Andy: interest charges. It's a great way just to start off
• 9:37
  Andy: with it. And just for that, just making sure there's
• 9:40
  Andy: maybe some money set aside in your normal current accounts
• 9:43
  Andy: that is there to pay off those things. If you're
• 9:45
  Andy: already maybe in a bit of a situation where things
• 9:49
  Andy: are getting out of hand, it's just not to ignore
• 9:51
  Andy: it. I know we say this all the time around any kind
• 9:53
  Andy: of debts, but it's so, so vital that the earlier
• 9:55
  Andy: you take action, the easier it's going to be for
• 9:58
  Andy: you to kind of get out of that mess and
• 10:00
  Andy: hopefully the other end start doing things in a way that we're going to be sort positively
• 10:03
  Andy: build your finances and your credit report and your wealth
• 10:07
  Andy: and all these things. And that is a big part
• 10:09
  Andy: there is if you are struggling and it's kind of
• 10:11
  Andy: starting to get out of hand is, look, we said
• 10:13
  Andy: not all credit costs money. Some of it's free. And
• 10:16
  Andy: there are naught percent balance transfer credit cards, naught percent
• 10:19
  Andy: money transfer credit cards. These are really good products that
• 10:23
  Andy: if you apply for them and you're accepted for them, you can
• 10:25
  Andy: transfer that debt over. There's often a fee, not always
• 10:28
  Andy: often like a small fee that's within it that you'll
• 10:30
  Andy: be charged on the balance you move over, but then
• 10:33
  Andy: your balance, that debt that's moved over is not getting
• 10:37
  Andy: charged interest for a certain amount of time and that gives
• 10:39
  Andy: you that ability to pull it down. You're not paying
• 10:41
  Andy: both what you owe and the interest, you're just paying
• 10:44
  Andy: what you owe. Hopefully you can clear that a lot
• 10:46
  Andy: faster. So that's a really good intermediate action. If things
• 10:50
  Andy: have gone even further and you kind of pass that
• 10:52
  Andy: and you're applying for these cards and you're getting rejected,
• 10:55
  Andy: I would say actually when you do apply for credit,
• 10:57
  Andy: often try and do what's called an eligibility search, first
• 11:00
  Andy: of all to give you an idea of how likely it is,
• 11:02
  Andy: it's never guaranteed, but how likely it's you'll get accepted
• 11:04
  Andy: rather than just go straight into a full application. But
• 11:07
  Andy: if that's problematic, there are debt charities you can talk
• 11:09
  Andy: to, Step Change, Advice Bureau, National Debt Line, and they
• 11:14
  Andy: will help you work through how maybe you'll come out
• 11:16
  Andy: that other end.
• 11:17
  Host: Amazing. I think like you said, there's a lot of
• 11:20
  Host: things to consider and credit should be seen as a
• 11:23
  Host: tool, a useful tool, but we need to make sure
• 11:26
  Host: that we're planning when it comes to using credit. So
• 11:29
  Host: Andy, we've come to the point, I ask all of
• 11:31
  Host: our guests what are the three tips that you can
• 11:33
  Host: give our listeners to help them get a little bit richer?
• 11:36
  Andy: So when it comes to credit, I think the first
• 11:37
  Andy: thing to do is to check your credit report and you can
• 11:39
  Andy: do this for free. It's not going to cost you
• 11:41
  Andy: any money. Actually three different credit reference agencies, which gets
• 11:44
  Andy: a bit complicated, but check that credit report. So just
• 11:47
  Andy: to have a look at it, check for any mistakes
• 11:49
  Andy: or anything there that doesn't look quite right and that's
• 11:51
  Andy: a great thing to do. Then as we said, I
• 11:53
  Andy: would then get a credit card. I know somebody might find
• 11:55
  Andy: that a bit scary, but do that soft search, that
• 11:58
  Andy: eligibility search, see what you can get. Doesn't matter about
• 12:00
  Andy: any fancy features. You just want any old credit card and
• 12:03
  Andy: you put your normal spending on it and you clear
• 12:05
  Andy: it every single month. That's the second thing that's going to
• 12:06
  Andy: really help you improve that credit score and give you
• 12:08
  Andy: that access to things later on. And finally, I would
• 12:13
  Andy: say what you want to be doing is making sure,
• 12:15
  Andy: this is so vital, that you do pay it every
• 12:18
  Andy: single month. And there was a little hack for that very
• 12:20
  Andy: simple one. It's just setting up a direct debit for
• 12:22
  Andy: the full amount.
• 12:22
  Host: I agree with that Yeah. Absolutely. It's the best way. If you feel
• 12:26
  Host: like you're going to forget or you don't want to
• 12:27
  Host: miss that payment, you set up a direct debit, it's all set up for you.
• 12:30
  Host: So I agree.
• 12:31
  Andy: Just make sure you've got enough money in the current account
• 12:33
  Andy: to cover it. S
• 12:35
  Host: Make sure. Yeah.
• 12:35
  Andy: And those three things, they're really going to help you put in a really
• 12:38
  Andy: good position for helping you use credit and get better
• 12:41
  Andy: access to credit in a few years time.
• 12:43
  Host: Amazing. Andy, this has been so useful. Packed full of
• 12:46
  Host: gems, as always. So thank you so much for coming
• 12:49
  Host: on and sharing all of that input on this episode.
• 12:53
  Host: Next week, I want to talk about what it means
• 12:55
  Host: to share money when you're living with someone. We'll be
• 12:57
  Host: coming up with ways to manage these conversations and agree
• 12:59
  Host: what works for you both. In the meantime, don't just
• 13:02
  Host: share your cash. Share this podcast too. Tell a mate,
• 13:05
  Host: leave a review and help other people start getting a
• 13:07
  Host: little bit richer. See you next week.