Your most pressing questions about credit, borrowing, and debt: answered

by | Dec 9, 2021 | Articles, Debt

Sponsored by Ilumoni

With the stigma and shame that surrounds debt, and the constant external pressure to finance your lifestyle with credit, it can feel like we’re caught between a rock and a hard place when it comes to borrowing. Used effectively, borrowing can help you to build a great credit score, help you to spread the cost of essentials, and be a great tool in your financial armoury, but it’s also very easy to lose track or get in too deep. We caught up with Jonathan, Co-Founder of borrower wellbeing app ilumoni, to answer your most pressing questions about credit, borrowing and debt.

  1. How can I use credit without getting into debt?

Being careful is key – you need to make sure that you have the right insight and understanding about what your borrowing will cost you in the long term. As soon as you start using credit to create growing or revolving debt, it has a chance of causing problems. A good thing to do is to always think about the cost of credit purchases with the interest added on, and try to use credit in a way that doesn’t lead to long term debt or paying more than you need to in interest.

 For example, there’s often a grace period on your credit card, which you can utilise to show responsible use of credit without incurring interest, as long as you pay it off in full at the end of the month, or when you get your statement. Just make sure that you fully understand the terms and timeframes on your credit card. If you’re using a 0% deal on a credit card to finance a bigger purchase, make sure you have a payment plan in place to ensure that you pay it off before the 0% deal ends – this way, you won’t pay any interest.

Using credit does always mean that you are taking on some debt, but that doesn’t have to be a bad thing, as long as you’re able to track it, understand the impact that it has, and pay it back in a way that shows you can manage your money well.

  1. How can I use credit smartly to improve my credit score? It seems to be a complete mystery!

Unfortunately, harming your credit score is much easier to do than repairing it but, although there’s no quick fix to get it back on track, it will happen if you’re patient. 

In terms of practical steps, your credit score is looking at whether you’re choosing sensible lending products, whether your debt is at reasonable levels and whether you’re managing it properly. It’s a good idea not to use all of your available credit as this will impact your credit score in a negative way. Avoid payday loans and withdrawing cash on credit cards, as this can be seen as risky behaviour, or evidence of not being able to manage your income or outgoings. Make sure that your debt to income (DTI) ratio – how large your debt is compared to your annual salary – is at a reasonable level. Aim for a maximum DTI ratio of 30% – ideally less. And that you make all your repayments on time. 

Some people’s scores suffer from them having a ‘thin file’ – i.e. not enough history of having used credit at all so, where possible, using a credit card consistently and responsibly will help you to get the best score. 

  1. What tips can you give to people looking to pay off debt as efficiently as possible?

The first thing, really, is to try and find ways to stop borrowing – because the cycle of paying off and re-borrowing can be really difficult to break, and frustrating for you. Look at the best options for you – you may be able to shift your debt to a 0% interest credit card, or consolidate lots of credit accounts into one manageable payment with a loan. You could also look to earn some extra income to throw at your debt, which can help to really reduce the overall amount you end up paying on debt that’s incurring interest.

A really simple thing to do, even if you’re finding that you can only afford the minimum repayment is, instead of setting your direct debit for the minimum repayment each month, set up a direct debit for the amount of the minimum repayment for the first month. If you set it up to collect the minimum repayment, that amount will reduce each month – making your repayments lower but extending the life of your debt and adding lots in repayable interest. By simply fixing your repayment at the first month’s minimum amount, you can save an awful lot of interest and shave years off the lifespan of your debt. The ilumoni app can really help with illustrating this to you. 

  1. What led you to found ilumoni? Are there any features that you’re particularly proud of or were super keen to include?

I’ve been working in financial services for most of my career, and it was obvious to me that the amount of debt that people have in the UK is growing, and people are now using borrowing to pay for essentials and not just luxuries. I wanted to make a tool that could spot how interest could be minimised and to make sure that people had all of the insights they needed to make informed decisions about their borrowing and debt. I knew that the AI and algorithms available could help people, and demonstrate to them the impact that small changes could have to their overall borrowing. 

My chat with Jonathan was one of the most helpful and informative Q&As that I’ve done for a very long time, and I’ve already started using ilumoni in anticipation of using credit more responsibly in the future. You can find out more about the ilumoni mission and offering here, and download the app today to take control of your borrowing, save money and gain peace of mind.

Information shared does not constitute financial advice, only tips and talking points. Please consult a debt advisor if you are struggling, or a financial advisor for any advice specific to your situation.