111. Responsible Credit: Best Credit Practices To Implement (Sponsored by Klarna)

In this episode of the Pennies To Pounds podcast, our sponsor, Klarna, joins us to provide a straightforward yet comprehensive breakdown of understanding different types of credit—credit cards, overdrafts, or personal loans. Raji Behal shares invaluable tips on when it’s smart to use credit and when it’s best to steer clear, helping you make informed financial decisions.

*Klarna's Pay in 3/Pay in 30 days are unregulated credit agreements. Borrowing more than you can afford or paying late may negatively impact your financial status and ability to obtain credit. 18+, UK residents only. Subject to status. Ts&Cs and late fees apply.

Learn more about Klarna by visiting: www.klarna.com/uk/

Transcript

Speaker 1: 0:00

Hey guys and welcome back to the Penny to Pounds podcast with your host, kia. And this is the podcast we aim to dispel your myths, simplify difficult financial jargon and rectify your own personal problems. Happy Monday, everyone. I'm looking forward to today's episode. Now, this week's episode is on something that many people use, whether it's to buy a car, take out a mobile phone contract or pay off a large purchase over time credit. Now, credit can be a handy tool when used correctly and responsibly, which is why it's so important to understand good credit practices and the potential risks that could arise if misused. To explain this topic further, I have a special guest joining me today, from Kalana. But before I introduce her, if you want to know more about how Kalana works, head over to kalanacom for more details. Borrowing irresponsibly may negatively impact your financial status. Pay in three and pay later are not regulated under the Consumer Credit Act. Terms and conditions may apply. Raji, thank you so much for coming on to the podcast.

Speaker 2: 0:56

Hey, Kia, so great to see you again and thank you for having me today. It's my pleasure. My name is Raji Bihal. I oversee the commercial organization for Klarna for Western and Southern Europe. I'm based in London, just relocated from the US and really excited to be here today Amazing.

Speaker 1: 1:12

I'm super excited for this. So, as we've already mentioned, credit can be used in many different ways, such as to spread the cost of a purchase. So I want to ask you then when is the best time to use credit and when should we think twice?

Speaker 2: 1:26

Sure. So we believe that primarily, it's wise to pay with the money that you have, but there are times when opting for the right form of credit may make sense. So, for example, sometimes it's helpful to actually physically receive a product before paying for it, just to ensure that you're completely satisfied with it, or it could help you spend smarter. So choosing an interest-free credit option for a one-time larger purchase, for example, your yearly holiday or a washing machine can help you manage your finances more effectively without incurring additional costs.

Speaker 1: 2:06

There are so many different types of credit available to consumers, including credit cards, overdrafts and personal loans, so how can someone then decide which line of credit is best to use in different scenarios?

Speaker 2: 2:18

Yeah, that's a great question. So first you want to really evaluate this scenario and the purchase. Why do you need these funds? How soon can you repay them? You should be able to repay them within the lifetime of the product. So, for example, if you're buying a refrigerator, you should be able to pay that over a couple of years, but if it's something more perishable, you should be able to do that more quickly. You also want to compare the costs. So looking at whether the line of credit changes, changes charges, interest and, if so, what the interest rates are, as well as any fees or additional charges. So lower overall costs mean less burden on your finances. You also want to assess your financial stability. So before entering any form of credit agreement, it's crucial to consider your. And then, what's the motivation of the lender? Will they make money from you? Do they make their comms and marketing or their terms and conditions clear? That see, you really understand the product, the terms and the consequences.

Speaker 1: 3:17

Those are some really useful tips that people can implement when they're going to seek which line of credit. That is, an alternative payment method offered by many retailers in the UK, klarna being one of the major providers. So could you explain to us how it works and the things that consumers should be aware of?

Speaker 2: 3:37

So Buy Now, pay Later is a form of credit, and Klarna provides short structured terms linked to a specific purchase, so we do not charge interest on any of these buy now, pay later products.

Speaker 1: 3:49

We also do not offer revolving credit, which is the kind of credit that can be postponed or rolled over indefinitely there is a lot of jargon associated with credit, which can sometimes feel overwhelming, so you are the best person to ask what keywords should you know when it comes to dealing with credit and how can you avoid being confused by all of the paperwork?

Speaker 2: 4:12

absolutely. I mean. Navigating the world of credit can sometimes feel like you're trying to decipher a foreign language, so let's break it down. Some of the essential terms that you will encounter. First off, you will hear about apr, or annual percentage rate, which is basically the cost of borrowing money on an annual basis. It includes both interest and any other charges associated with the loan. And then there's your credit score, which is a numerical value that lenders will use to assess your financial standing and how reliable you are at repaying those costs.

Speaker 2: 4:48

The principle is simply the amount of money you originally borrowed or invested, not counting any interest or additional fees. Interest is the fee that you may pay for borrowing money, usually given as a percentage of the principal. And then interest-free products, such as Klarna's Pay-in-Three means that consumers are not charged additional amounts for borrowing money when they pay back on time. And then, when it comes to rates, you have both fixed rates and variable rates. A fixed rate will not change throughout the life of the loan, making it easier to budget, while a variable rate can fluctuate based on market conditions, which may save you money or cost you money in the long run. And then other terms to consider would be credit limit, which is the maximum you can borrow at any time on one line of credit. The minimum payment, which is the smallest amount you can pay by the due date to keep your account in good standing, and default, which would happen if you fail to repay the loan according to keep your account in good standing and default, which would happen if you fail to repay the loan according to your agreement.

Speaker 2: 5:53

So I know this can be overwhelming, but in order to you know, keep from feeling overwhelmed, you really need to read carefully and make sure that you're understanding everything in the documents before you sign them. Pay special attention to anything about interest rates, fees, repayment schedules and penalties. You want to ask questions. Never hesitate to ask for clarification. If anything is unclear, you can always talk to your lender or your financial advisor. Understand your rights. Know your rights under regulated financial products, as these often come with more protections than unregulated ones. Keeping records you want to hold on to all of your agreements and the terms you accept. You want to stay informed, keep up with changes in the financial regulations to see how they might impact you and, of course, budget wisely. You have to know your financial limits to avoid borrowing more than you can handle. So there are a lot of terms, but by familiarizing yourself with them and practicing careful financial management, you can navigate the world of credit with more confidence and less confusion.

Speaker 1: 7:01

You know what? I already feel more confident hearing those terms broken down by you and knowing what you need to do before you go and take out a line of credit. So thank you so much for that breakdown. That was really helpful.

Speaker 2: 7:10

My pleasure.

Speaker 1: 7:11

Credit can be a necessary lifeline when things go wrong. For example, your car breaks down, your washing machine stops working and you need to fix things that you may have not necessarily financially planned for. So when is it the right time to use credit for emergencies and how can you ensure it doesn't become a big problem?

Speaker 2: 7:30

Yeah. So the answer in that is actually in line with the overall principles on when to use credit and what provider to choose. So really the same as you would a non-urgent transaction. You want to ask yourself these questions Does using credit help me manage my cash flow? Can I pay it off within the predetermined timeframe? Does the length of credit match the lifetime of the product? And does this particular credit provider put their customers first? So in a moment of emergency, it's even more important to really pause and ask yourself these questions and answer them clearly for yourself.

Speaker 1: 8:06

Now that's really useful. Take a moment, ask those questions and then you can make an informed decision Amazing. Before we run off, then, let me ask you, raji, what are your top three tips that you'd like to leave our listeners with with regards to using credit responsibly?

Speaker 2: 8:20

Sure. So the first is planning your payments. Always have a repayment plan in place before you take on credit. Understand the full terms, from interest rates to due dates. Secondly, stay within your means. Only borrow what you need and can comfortably repay without compromising your financial health. And third, stay informed. Stay updated on the financial status in any credit changes or regulations that may affect you.

Speaker 1: 8:46

Amazing Raji. Thank you so much for sharing your insights on this podcast episode. If you're listening and would like to learn more about Kalana, visit kalanacom or visit the link in our episode description. Thank you for listening and we'll be back again next week with another episode. Bye, guys.