Whilst every lender is required to disclose the APR on their products, this doesn’t mean that you are guaranteed to get that rate. In reality there can be as little as 51% of applicants who receive the APR advertised, which means that up to 49% of people could get a different (usually higher) APR.

You won’t know the APR you are going to get until after you’ve applied for the debt, so bear this in mind before making an application. Each time you apply for new debt this will be recorded on your credit file meaning you should avoid applying for too many different products at the same time. It can be useful to check your credit report before applying for any debt as a good credit rating will help maximise your chances of being offered the advertised APR. You can learn more about credit ratings here (link to credit rating section of website).

You can find more information on APRs and things to be aware of here.

The table below shows the cost of borrowing £5,000 for 5 years:

If you were to borrow at 20% APR, you are paying £34 pm more than if you can arrange to borrow at 5% APR. And the total you pay will be £2,000 higher!

So if you do have debts, try to borrow with the lowest APR you can find.

Here are some different types of borrowing with typical long term APRs:

(* you often see much higher numbers quoted by payday loan companies - this is because they have to quote the cost of borrowing for a year, but these loans are often just for 30 days or so.)

This video describes how interest is calculated using an Annual Percentage Rate (APR).

There are lots of factors that go into calculating your credit score. These include but are not limited to the following:

• Information about any existing borrowing: This will include details of all your debts and repayments, outstanding balances and defaults.

• Information from the electoral roll: This will include your address and confirm that you are who you say you are. If you’re not on the electoral roll you’ll probably get turned down for credit so make sure you register to vote.

• Court records: Including details of any County Court Judgements (CCJs) that are against you and if you’ve ever been bankrupt or had your house repossessed.

• Details of people you are financially linked to: This can be anyone with whom you have a joint credit product eg a joint mortgage or credit card. If the other person has had financial difficulties in the past then this can impact on your own credit score.

Information usually remains on your credit report for up to 6 years.

You should be aware that student loans are not taken into account when determining your credit score.

There are currently three credit rating agencies Experian, Equifax and Callcredit. Each of these agencies will put together a credit score but they do not all use the same formula. This means that you don’t have a universal credit rating and each agency could assign you with a different rating. In addition, different lenders may base their decisions on the rating produced by one or more of these agencies so it’s important to know that the information held by all three agencies is correct.

Even small errors on your credit report can cause problems in getting new credit so it does make sense to check your score before taking out any new debt eg a mortgage, loan or credit card. If you find errors on your record you can flag these with the credit rating agency and get them corrected but this might not happen immediately. It can therefore be worthwhile checking your score every 1-2 years to make sure all the information is correct and ready to go when you are.

You have the right to see your credit report and you can do this for as little as £2 from the three credit rating agencies. However, the credit rating agencies often offer you the option to sign up to constant monitoring of your credit score (for a regular fee) and make this seem attractive by giving you a month long free trial. This can be a useful way of checking your score for free but it’s unlikely to be necessary to track your score on a monthly (or more regular) basis, so you should ensure that you cancel your subscription before you start being charged for the service.

For more information on how you can check your credit score for free, click here.

It can be very difficult to get credit if you’ve never had credit: In these cases you don’t exist to the credit rating agencies and effectively have no track record. It makes sense that a lender would not want to lend to you if they didn’t know that you were a reliable borrower. If you think you might fall into this trap then you can build up your credit rating by taking out a credit card with a small limit, spending on this each month and then paying off the balance in full. This will mean that you don’t pay any interest on the money you borrow and will also start to give you a credit history.

Lots of different applications can damage your credit score: Each application you make will be recorded and the more you make, the worse your credit score may be. This is because if you are rejected then you’ll likely want to apply somewhere else. You should therefore prioritise your applications and avoid applying for more minor borrowings such as credit cards in the lead up to applying for more significant borrowings such as a mortgage. Any applications stay on your record for one year so bear this in mind when deciding when to borrow. To avoid multiple applications you can use a free online eligibility calculator to see which products you may be accepted for.

Beware of fraud scoring: Credit rating agencies will track how consistent your applications are so you should make sure you use the same information across all applications otherwise they may not think you are legitimate and you may get turned down.

Payday loans are meant to be very short term loans to tide you over if you need cash before you get paid, and cannot access any other form of cheaper borrowing. They are a very expensive way of borrowing money and if not quickly paid off in full, your debt can quickly build to a problematic amount. Only turn to a payday lender once you have exhausted all the other alternative ways to borrow. If you really have no alternative, make sure you shop around, for example by using an online comparison site, to make sure you’re getting the “least worst” option.

A good guide to payday loans and alternatives can be found here.

If you borrowed £100 for 30 days and the interest was 0.8% per day, you would be required to pay back £124 at the end of the 30 days. If you used a credit card, you would be required to pay back £100 if you pay back within the interest free period. Even if you didn’t pay back the money immediately, the interest on the credit card would be around £2. The total you owe after one month would therefore be £102.

The amount owed to the lending company can quickly build up if you don’t have the spare cash each month to pay back the loan. In the example above, borrowing £100 for 30 days means you have to pay back £124 at the end of the 30 days. If you need to borrow £124 to pay back the loan and borrow for another 30 days, you will owe £154 at the end of the period. If you continue doing this for months, the loan builds up very quickly…

And all from borrowing an initial amount of £100! This shows us that payday lenders should only be used as a way to borrow for the short term, if at all.

Payday loans are something to avoid if possible. However, if you do get into the position where a payday loan is the only option and you find you cannot pay back the loan and need to borrow again to do so, wait until the last minute to borrow again. Look what happens to the amount owed if you wait until 5 days before payday so that you are borrowing for 5 days rather than 30 days.

So if you have to borrow using a payday loan, don’t roll over the loan, but pay back the loan using your salary and then take out another loan when your bank account starts to be insufficient to pay your bills and living expenses.

It can be comforting to have savings alongside debt but this could be costing you money! The key is knowing the APR you are paying on your debt and the interest you are earning on your savings. If your debt APR is higher than your savings interest rate then you could save money by using your savings to pay off your debt.

Watch the video to find out how this works.

There are some exceptions to this…

• Interest free debt: for example, if the only debt you have is a 0% credit card then you are effectively borrowing money for free and, as long as you are on this 0% rate, you may be better holding some of your money in savings. Bear in mind that any 0% rate will eventually end and at this point you may want to use your savings to pay off your debt or move quickly to find another 0% deal.
• Penalties: You may be locked into your debt and be subject to early repayment fees, depending on the size of the penalty it may still be worthwhile using your savings to pay off your debt but make sure you understand the numbers involved before making a decision.

Here’s an example of where using your savings to pay off your debt could help you save money:

Let’s say you have £5,000 of credit card debt with an APR of 20% . The interest on this is £1,000 a year. At the same time you have £5,000 of cash savings, earning interest at 0.5% pa. This means you earn £25 interest each year.

If you used your cash savings in this example to pay off your debt then you could be £975 a year better off!!