When to use credit and when not to

Credit is neither inherently good nor inherently bad, and the distinction between useful and damaging borrowing is more specific than a general attitude.

The questions

Which sort most decisions.

Is this necessary now, or could it wait until it is saved for?

Will the thing outlast the borrowing, or will I still be paying after it is gone?

Does it produce income, savings or capability, or is it consumption?

What is the total cost over the term, not the monthly payment?

What happens if my income falls during the term?

And is there a cheaper form of the same borrowing?

Where borrowing is generally defensible

Categories.

Housing, where the alternative is rent and the asset generally outlasts the loan.

Education and training that increases earning capacity, subject to the calculation actually working.

Essential replacement of something necessary that has failed — a boiler, a vehicle needed for work.

Business investment that produces a return exceeding the cost.

Genuinely interest-free finance where you have the money and it can earn meanwhile.

And, in an emergency, borrowing from the cheapest available source rather than the most accessible one.

Where it generally is not

Also categories.

Consumption that could wait: holidays, upgrades, discretionary purchases.

Anything financed because the monthly payment fits rather than because the total cost is acceptable.

Anything where the finance enables a more expensive version than you would otherwise buy.

Everyday spending, which indicates a budget shortfall rather than a financing decision.

Borrowing to repay borrowing, unless the rate is genuinely lower and the term is not extended indefinitely.

Investments, where leverage magnifies losses as well as gains.

And anything from a high-cost lender where a cheaper alternative exists, which is more often than people realise.

The stress test

Which is the useful discipline.

Before committing, consider: could I still make these payments if my income fell by a fifth, if rates rose, or if I were unable to work for three months?

If not, the borrowing is larger than it should be.

Lenders apply their own stress tests to mortgages for exactly this reason, and applying one to your own decisions is sensible.

And the answer determines the size of the borrowing rather than whether to borrow at all.

The cheapest forms

Roughly ordered.

Secured borrowing against property, which is cheapest and puts the property at risk.

Personal loans from mainstream lenders.

Credit union loans, which are capped and accessible.

Zero per cent credit card offers, used with a repayment plan.

Standard credit cards.

Overdrafts, which following regulatory reform are comparable to or more expensive than cards.

And high-cost short-term credit, which should be a last resort after checking the alternatives discussed elsewhere on this site.

The alternatives to borrowing

Frequently overlooked.

Waiting and saving, which is available for anything not urgent.

Buying second-hand.

Repairing rather than replacing.

Local welfare assistance and charitable grants for essentials.

Employer salary advance schemes, which some offer at no cost.

Arrangements with the creditor you are trying to pay, which is frequently cheaper than borrowing to pay them.

And a benefits check, since unclaimed entitlement is frequently the gap being filled by borrowing.

The protections worth using

When you do borrow.

Credit cards provide purchase protections in some jurisdictions that other methods do not, which makes them the sensible payment method for large purchases even when cleared in full.

Regulated lenders are subject to affordability requirements and complaints processes.

Written terms setting out total cost, term and any charges.

Cooling-off periods, which apply to many credit agreements.

And checking the lender is authorised on the regulator's register, which takes two minutes.

The signal to act on

Worth recognising.

Borrowing for essentials, borrowing to make minimum payments on other borrowing, and borrowing more frequently than before are all signals that the problem is income against expenditure rather than a financing decision.

At that point the useful actions are a benefits check, free debt advice and addressing fixed costs — not a better credit product.

And recognising this early produces considerably more options than recognising it later.

General information only, not financial advice. Check any lender's authorisation on your national regulator's register, and contact a free debt advice service if you are struggling.