Using credit wisely

While retirement is full of opportunities, they are often shaped by how much money we have to spend on pursuing them. Similarly, later life, as with any life stage, has its own challenges, and how we meet them depends to a large extent on our finances.

StepChange Debt Charity shares its tips on how to use credit without getting trapped by debt.

Whatever your circumstances, whether you have debt or not, it will not cost you anything to understand what credit is available to you and what solutions are there if you struggle with it – and it might just save you money.

While credit can be a really useful money management tool in retirement, giving us freedom to do things for ourselves and the people we care about, it can also leave us in a debt trap if we don’t use it carefully.

Here is a look at how credit can be used in later life in a way that avoids it becoming problematic.

Will using credit always create problems?

There are two main reasons why we might want to use credit as we get older:

• it can be a carefully thought-out decision to use credit to go on a once-in-a-lifetime trip or make home improvements;
• or it can be to pay for day-to-day essentials that can become increasingly hard to afford when you are living on a fixed income or have increased costs due to health issues.

This doesn’t mean that you can't find yourself with a debt problem when you freely choose to use credit, or that you will necessarily run into problems when you use credit as a result of a pressing need.

What makes the difference between repaying debt and struggling with debt is knowing what type of credit is best for your circumstances. Understanding the different types of credit available is key to this.

Choosing what type of credit you want

There are lots of different types of credit available and they all have slightly different terms and conditions. This can make it complicated to work out the differences between them.

The main types of credit are:

• Credit cards: No interest is charged on borrowings if you pay your full bill within a set number of days. However, credit cards are not suitable for long-term borrowing as interest rates are high. Remember that you may also be charged for borrowing cash.
• Personal loans: These loans are suitable for medium and longer term needs. Generally, you pay a fixed amount back every month and many lenders will allow you to pay it off sooner.
• Overdrafts: An overdraft is suitable if you have short-term cash problems.
• Payday loans: Payday loans are usually small short-term loans that have very, very high interest rates and if you don’t pay the loan back on the date it’s due the lender will add extra charges to your account; these charges are often very high.
• Hire purchase: These are hire agreements offered by shops where you can hire and eventually buy particular items such as furniture or electronic equipment. You do not own the item until the last instalment of the loan is paid.

Deciding what type of credit is right for you

When deciding what type of credit is appropriate for your circumstances, you should consider the following:

1. Do you need to use the credit or do you want to? If you need to, you may have a personal finance problem and should seek free money and debt advice before you seek credit. If you want to, consider other ways that you could pay for it before you use credit because it will always cost you more if you use credit.
2. Choose the best terms and conditions: If having considered that question you still want to use credit, you need to consider the different terms and conditions of the various types of credit, choosing one that matches your needs as well as ability to repay.
3. Then shop around for the best deals: There is a range of price comparison websites that will be able to help you with that.
4. How will repay your debt, realistically? Before you apply for any credit, realistically work out how you will repay it. It is essential that you make allowances for extra demands on your finances, and understand any charges and interest that you will accumulate if you cannot repay your credit as planned.

What do I do next?