What is credit?

Credit is a form of borrowing, such as a loan, mortgage, overdraft or credit card. A loan is a lump sum that you repay in fixed monthly instalments over a set period. Whereas a credit card comes with a set credit limit, then you repay the balance on a monthly basis.

6 min read
young woman on laptop drinking coffee

Different types of credit

Having a good mix of credit and maintaining your repayments can show lenders that you’re a responsible borrower. This may improve your chances of getting accepted for finance in the future. So, if you open different lines of credit and pay on time, every time it could boost your credit score.

However, you should only borrow what you can afford to repay. We don’t recommend taking out extra credit just to bulk out your credit report, as this could put you into financial difficulty.

Credit cards

Credit cards allow users to purchase goods or services on credit and pay back the outstanding balance over time. Your card will come with a fixed credit limit set by your lender. They’ll bill you monthly and when you receive your statement you can:

  1. pay the balance off in full
  2. make at least the minimum payment (to avoid late fees and missed payment markers on your credit report)

Most credit card providers charge interest. However, you can avoid paying any interest at all by clearing the balance in full and on time, every month.

Any remaining balance will roll over to the following month and further interest will apply.

What types of credit card are available?

There are many kinds of credit cards available in the UK, including:

  • Credit builder cards - designed for people with bad credit. They typically come with high interest rates to offset the risk involved for the lender
  • Travel credit cards – can be cheaper than using your regular credit card abroad
  • Reward cards - these usually come with an annual fee in return for rewards (such as air miles or cashback, for example)
  • Purchase cards – help to spread the cost of large purchases. 0% introductory rates may be available for a set period, but are usually reserved for those with good credit
  • Balance transfer cards - often come with 0% introductory rates for a set period, so you can transfer existing debt to your new card and reduce the cost of borrowing. You may need a good credit score to be eligible and a transfer handling fee may apply
  • Balance transfer and purchase cards - allow you to make balance transfers and spread the cost of purchases. Again, a transfer handling fee may apply, and they’re usually reserved for those with a good credit history
  • Money transfer credit cards – let you move money from your credit card to your bank account (to clear an overdraft for example). You then pay the credit card balance instead. 0% introductory rates may be available; however, you may need a good credit score to get accepted

At Ocean, we offer a credit card designed to help those with poor credit. If you pay your card balance on time, every time, you can improve your credit rating and show lenders that are a reliable borrower. This will be useful if you want to apply for a different form of credit in the future, such as a mortgage.

However, it’s important to only borrow what you can afford to repay. Make you sure don’t:

  • miss any payments
  • pay less than the minimum amount
  • exceed your credit limit
  • withdraw any cash using your card

If you do any of the above, it can harm your credit score and your ability to get finance in the future. Note, you’re likely to face fees and high interest rates if you withdraw cash using a credit card.

Loans

Loans allow you to borrow a lump sum of cash upfront and then pay it back (including interest) in fixed monthly payments, over a pre-agreed timeframe.

Loans fall under two main categories:

  • unsecured loans
  • secured loans

Unsecured loans

You don’t need to use an asset as collateral to get an unsecured loan. This means your home won’t be at risk if you fail to meet the repayments - but your credit rating will be. Examples include personal loans and student loans.

As an unsecured loan isn’t secured to an asset, your lender will normally want extra reassurance that you can afford to pay it back. They’ll run a credit check as part of the application process to see if you have a good credit history. They use your past financial behaviour to predict your future behaviour. So, if you have less-than-perfect credit, your options may be limited.

However, there are certain lenders who specialise in providing finance to those with bad credit. Here at Ocean, we work with such lenders to provide personal loans ranging from £1,000 to £10,000. Bear in mind, they usually come with higher interest rates than mainstream lenders, to offset some of the risk the lender is taking.

Secured loans

If you want to consolidate your debts or carry out some home improvements, you could consider a homeowner loan. This type of loan is secured against your property, so it’s important you make the repayments on time, every time, or your home could be at risk of repossession, (however this is usually a last resort).

This added security often gives lenders the comfort to lend larger sums of money with lower interest rates, compared to unsecured loans. At Ocean, we offer homeowner loans ranging from £10,000 to £100,000. You don’t necessarily need good credit to be eligible.

Mortgages

A mortgage is a type of loan used to buy property. It’s a set amount secured against the property you purchase. If you don’t keep up with your monthly repayments, you could risk losing your home (though this is usually only a last resort).

Tip: When applying for credit, it’s a good idea to stagger your applications. If you’re hoping to apply for a mortgage in a few months’ time, you may want to hold off making any applications until a later date. Otherwise, you may give lenders the impression that you are desperate for cash, which could put them off.

Overdrafts 

An overdraft is a form of credit that’s attached to your bank account. It allows you to spend more than you have in your account, up to an agreed limit. This is known as an ‘arranged’ or ‘authorised’ overdraft. How large or small your overdraft is will depend on the agreement you have with your bank.

You could see it as a short-term option, or a safety net for emergencies. As long as you stay within your credit limit and pay the balance in full, lenders should see you as a low-risk borrower.

Be aware though, being reliant on your overdraft to pay your bills is likely to put lenders off. Plus, you may be charged for dipping into it and for setting it up. So, it’s best to use it sensibly and check the terms and conditions before you apply.

Take care not to spend over your agreed overdraft limit, otherwise you’ll end up in an ‘unplanned’ or ‘unauthorised’ overdraft.

You won’t be charged higher interest rates for going over your limit, but it can hurt your credit score. It can also give lenders the impression that you’re in financial difficulty. These factors could affect your ability to get approved for credit in the future.

Improve your credit rating with Ocean Finance

  • Credit limit of up to £1,500
  • Quickcheck won't impact your credit rating
  • Check your eligibility in 60 seconds
Check now

39.9% APR
Representative (variable)

Intelligent Lending Ltd (credit broker). Capital One is the exclusive lender.