Q. I HAVE recently moved out of my parents’ house and I’m finding it difficult as there are now lots of things that I have to organise and pay for that I never had to think about before. My friends tell me to buy the furniture with a Buy Now Pay Later (BNPL) deal and get a credit card, as this will allow me to buy everything I need and help me build up a good credit score for getting a loan or mortgage later. They say they’re free loans once you clear the bill every month. Is all this correct or is there a better way?

Congratulations on getting out and into a place of your own. It is indeed a big step. I remember this as the moment I felt like an actual grown-up for the first time. I also remember the financial burden that came with this moment. Your question is a stark reminder to all young adult children that they too will have to move out and think about this sooner rather than later.

Many young people don’t know how credit cards work, how much they cost, what having a credit card entails, or the responsibility that comes with the credit more broadly. Many card holders don’t know how much interest they’re paying or how credit card interest even works.

First thing to consider before you even go near a form of credit – whether that be a loan, a credit card, a BNPL service, or even a mortgage – is why you are doing it? Is it something you simply must have now, but don’t have the finances to pay for at the minute?

Most people don’t have the cash to buy a car at a moment’s notice, or €300,000 to drop on a house, and sometimes it just is not possible to devote time to saving. However, it’s worth noting from the offset: credit can cost. Interest is applied to most credit agreements because you are paying for the facility, and rates can vary widely. Yet ,despite its costly and complicated nature, sometimes credit is the only way of affording things.

So where do you go from there?
  • Credit cards can be a convenient way to pay for things without having cash in your pocket. They can be a good source of credit, if you use them in the right way. However, they can get very pricey very quickly, and an outstanding credit card balance can be one of the most expensive forms of borrowing out there. The amount of interest you are charged normally ranges from 13 per cent to 26 per cent.
  • Almost all credit cards come with an interest-free period, whereby if you pay your bill in full before its due date you will not be charged any interest. Each credit card bill comes with a minimum repayment threshold, which is a percentage of what you owe. If you only meet this amount in a month, it could take years to clear the debt and you will pay much more in interest over the term. If you fall behind on your payments, while interest continues to mount, then you run the risk of your account going into default.
  • In relation to your point about getting a credit card to obtain a credit score, this is not correct because credit scores don’t exist in Ireland. Instead, banks judge whether to lend based on the Central Credit Register, a system that collects and stores information about any loans or credit taken out by an individual. It’s a factual transcript of the money you’ve been repaying, or not repaying, but it’s not a score. Sure, a good track record with credit cards is definitely a factor worth considering for some banks, but it’s not a prerequisite, and no record is better than a bad one.
  • So, while credit cards are accessible, there is plenty to be wary of, and the same can be said for other, widely-attainable forms of credit, such as BNPL services. These services work by allowing consumers to pay for purchases in a number of instalments at regular intervals. Interest is accrued by the consumer, but in most cases, repayments may be interest free. BNPL services are still credit agreements and come with all the responsibilities of them.
  • Before you start purchasing and spreading out costs, you must ask yourself, ‘can I afford to make this repayment and any others due in the next month and the month after?’ And, what happens if you miss a payment? While the cost might be lower with a BNPL platform, the stakes are much higher than buying your order outright.

In summary, it’s important before you take out any form of credit that you have read into and understand the agreement you’re entering into. You need to know your obligations, understand the overall cost, and be aware of any consequences of being unable to make repayments.

This article aims to give information, not advice. Always do your own research and/or seek out advice from a Financial Broker before acting on anything contained in this article.

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