The danger of debt

Free money? If it sounds too good to be true, it probably is! When you turn 18, you will be able to borrow money from banks and lenders, but don’t sign on the dotted line until you’re confident that you understand the key financial terms in this video.

Here's a handy glossary to guide you away from the terrors of debt!

Debit means you’re spending money you already have in your bank account. When you use a debit card in a shop for example you are spending only the money you hold in your bank.

Credit is another word for borrowed money. If you have £100 on a credit card, it's not technically your money, it belongs to the bank and you will have to pay it back, usually with interest.

Small print. When you borrow money you will be asked to sign a contract. A contract is a written agreement between you and the bank. You need to read contracts very carefully so that you understand the terms and conditions.

Interest is what the bank charges you for borrowing their money. Banks also pay you interest on money you have in your savings account.

APR stands for ‘annual percentage rate’. It includes the amount of interest you will pay for borrowing money, along with any other bank charges. Generally, the lower the APR, the less you will have to pay to borrow the money.

Credit score. This is a record of all the money you’ve borrowed and how good you have been at paying it back. The higher your score, the more trustworthy you are.

Top tips

So, before you borrow money, always:

  • Think very carefully about whether you really need to. Do you really need to buy something new right now, or can it wait a while? Could you save up and buy it instead?

  • Do your research. Make sure you are choosing the best deal out there – don’t just go with the first one you see

  • Read the small print: check the rate of interest and APR. The lower the better

  • Plan ahead and make sure you can afford the repayments. Don’t borrow money if you aren’t sure that you can pay it back. If you miss any repayments this will lower your credit score, and mean that banks will be less confident lending to you in the future.

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