Borrowing, credit and debt

Borrowing lets you buy something now and pay later, but it usually costs extra. Used carefully it can help; used badly it can become a heavy burden.

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Types of credit

Credit means borrowing money and paying it back later.
Credit card: borrow up to a limit and pay back monthly.
Loan: borrow a fixed sum and repay in instalments.
Overdraft: spending more than is in your current account, up to an agreed limit.
Mortgage: a long-term loan to buy a home.
Buy now, pay later: spreading the cost of a purchase.
You usually have to be 18 to take out credit such as a credit card or loan.

The cost of borrowing

Lenders charge interest. The APR (Annual Percentage Rate) shows the yearly cost, including fees, so you can compare offers.
Example: borrowing £600 for a year at 20% interest costs about 20% of £600 = £120, so you repay about £720.
If you only pay the minimum on a credit card, interest keeps building and it can take years to clear.
Missing payments can lead to fees and harm your credit score, making it harder to borrow later.

Debt problems and help

Debt is money owed. It becomes a problem when repayments cannot be kept up.
Warning signs: borrowing to pay other debts, missing bills, or using credit for everyday needs.
Free, confidential help is available, for example from the government-backed MoneyHelper service and debt advice charities. Get help early.
Good habits: borrow only what you can afford to repay, compare APRs and read the terms.
Worked example

Option A: borrow £1,000 at 10% a year. Option B: borrow £1,000 at 25% a year. How much more interest does B cost over one year?

  1. Option A: 10% of 1,000 = £100.
  2. Option B: 25% of 1,000 = £250.
  3. Difference: 250 minus 100 = £150.

Answer: £150 more, so compare APRs before borrowing.

Key idea

Credit means borrowing and paying back later, usually with interest. APR shows the yearly cost so you can compare. Paying only the minimum or missing payments makes debt grow and harms your credit score. Free debt advice is available.

Key words
Credit
Borrowing money and paying it back later, usually with interest.
Debt
Money that is owed to someone else.
Interest
Money paid for the use of money: savers earn it, borrowers pay it. Shown as a percentage per year.
APR
Annual Percentage Rate: the yearly cost of borrowing, including interest and fees, used to compare credit offers.
Credit score
A rating, based on your history of borrowing and repaying, that lenders use to decide whether to lend to you.
20%
The basic rate of Income Tax in England, Wales and Northern Ireland, and the standard rate of VAT.

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Quick check

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Extra practice

2 more questions

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  1. Which of these is a form of credit?

    1. A savings account
    2. Pocket money
    3. A birthday gift
    4. A loan
    Show the answer

    Answer: A loan

    Credit means borrowing money and paying it back later, usually with interest.

  2. What does APR stand for?

    1. Average Payment Return
    2. Annual Percentage Rate
    3. Automatic Pay Rise
    4. Approved Personal Reward
    Show the answer

    Answer: Annual Percentage Rate

    APR shows the yearly cost of borrowing, including interest and fees.

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Sources and references

Checked by the GCSE-ready editorial team, 23 October 2026. Last updated 2 October 2026. Spotted a mistake? Tell us and we will fix it.

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