Borrowing is a difficult area to fully evaluate when talking about personal finances. Done right, using credit can be a highly effective way of protecting yourself but it does demand that you only borrow responsibly.
As such, here is a look at how borrowing can protect you. A lot of this is designed with credit cards in mind, as these are one of the best ways to protect your money when making purchases, and you can find out more about credit cards in the UK online.
Understanding risk and costs
Part of utilising credit, as with all financial matters, is understanding the risks and costs involved. A credit card, for instance, has a small risk associated as you know how much you’re borrowing and the interest rate is clearly stated.
Many cards do not charge interest if you pay off the balance on time and this is an effective risk-management technique. In other words, if you borrow a certain amount and pay it back on time then you’ll only be charged for that initial cost of the purchase without any additional fees.
A credit card offers a safe option to borrowing as you’re familiar with the terms and conditions and have a pre-agreed credit limit. This is determined by your lender, based on the risk you pose to them, but if you feel it is too high then most firms will allow you to change it to a lower figure. You should always approach credit limits with caution and ensure the restriction you face is one which is neither too high nor too low.
As a form of protection, insurance reduces the possibility of larger costs being incurred by asking for a smaller cost up front and credit card can be viewed as a similar option. By addressing things in the short-term, you reduce or remove the risk of long-term costs and other threats to your financial situation and many credit cards even offer protection on your money when you make purchases.
This means that any large purchases you make will be protected by your credit card – ideal if you book a holiday and need to reclaim your cash because the firm has gone into administration or cancelled your booking. Whilst this is a large-scale example, smaller purchases receive the same level of protection if purchased on a credit card, making it an essential form of payment.