In most cases, when someone applies for credit, the lender will look at their credit history along with the information gathered from their application form to decide whether or not to approve their request.
Let’s explore some of the most common types of credit:
When a lender provides a loan to a borrower, this is known as credit. Credit lets you pay for goods and services using money loaned to you by your agreed lender when you may not have the funds available. You then pay it back within an agreed timeframe and, possibly, at an agreed rate of interest. There are lots of different types of credit – including overdrafts, credit cards, loans and mortgages.
An overdraft allows you to spend more than you have in your bank account, and so acts like a safety net on occasions when a bill or standing order might go out and you don’t have enough funds to cover it. How large or small your overdraft is will depend on the agreement you have with your bank. You may also be charged an admin fee or arrangement fee when you set up your overdraft.
Take care not to spend over your agreed overdraft limit, as you may be charged interest when you do so. In some cases you could be charged for every day that you’re overdrawn. If at any time you’d like to extend your overdraft limit, you’ll need to speak to your bank to see if they’re willing to do this – but they may turn down your request, or recommend an alternative form of credit.
Credit cards allow users to purchase goods or services on credit. Customers typically receive a monthly bill for their borrowing and can pay it off in full, or pay anything over the agreed minimum charge towards it. Most credit cards charge interest in return for the ability to borrow, but by paying the balance in full each month customers may avoid this.
Borrowers can also use their credit cards to withdraw cash from cash machines, although this isn’t recommended as there are often fees involved and a higher interest rate is charged compared to when simply using the credit card to pay for goods direct.
There are hundreds of different credit cards available in the UK – including charge cards, reward cards, store cards and balance transfer cards. At Ocean we offer a credit boosting* credit card, which is available with a credit limit of up to £1,500. By paying your balance – ideally in full – as soon as you receive your bill, you may be able to improve your credit rating as you’re showing that you can borrow responsibly. This will be useful if you’re thinking of applying for a different form of borrowing, such as a mortgage, in the future.
*Not paying your minimum payment or staying within your credit limit could harm your credit rating.
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Loans usually allow you to borrow more in one go than you would using a credit card and they’re paid back over a pre-agreed period of time.
There are a range of different loans. For example, if you’re thinking of carrying out some home improvements or maybe building an extension, you could consider a homeowner loan to fund the work. This loan is secured against your property, so it’s important you keep up with your repayments or your home could be at risk of repossession. At ocean, we offer homeowner loans from £10,000 to £100,000.
Another option is a personal loan. This is unsecured, which means your home will not be at risk if you don’t meet the repayments, although your credit rating will be. And because it’s unsecured, the interest charged is often higher than on a secured loan, while the amount you can borrow may be less. Ocean offers personal loans from £100 to £10,000.
A mortgage is a type of loan used to buy property. It’s secured against the property you purchase, so if you don’t keep up with your monthly mortgage payments you could face losing your home.
When applying for credit, it’s a good idea to stagger your applications. If you’re hoping to apply for a mortgage in six months’ time, you may want to hold off making any applications for credit cards or loans until a later date. Lenders can be reluctant to lend to people who have made multiple applications for credit in a short time, as they could appear to be desperate to borrow.
Before you make an application, check your credit history to make sure there are no errors. If your credit rating is not what you hoped, there are ways you can try to improve it. To find out how to go about this, click here.