Types of credit

Find out about some of the most common forms of credit and work out which is right for you.

Published: 17/05/19Published on May 17th, 2019

Last reviewed: 21/09/23Last reviewed on September 21st, 2023

4 mins read

Credit means borrowing money and paying it back later. Any money lent to a person or company is a form of credit. There are many different types of credit products, such as credit cards, overdraft facilities and loans. Managing these various credit products well will help you achieve a good credit score.

Here’s a quick guide to some of the most common forms of credit.

Credit cards

Credit cards allow users to borrow money from a bank or credit card issuer to purchase goods and services or to withdraw cash. Some of the most common types of credit card are:

Credit builder cards

Credit builder cards, like the Aqua Classic, are designed to help you improve your credit score.

34.9% APR Representative (variable)

Reward cards

Reward cards give you rewards for using the card. The most common reward is cashback, so reward cards are sometimes called "cashback" cards. These cards give you a percentage back on your everyday spending. Although, the reward can also come in the form of points that can be converted to vouchers for shops and hotels. Rewards cards are a good choice if you don’t carry over a balance from month to month. 

Lower interest cards

Lower interest cards, like the Aqua Advance, reduce your interest rate as a reward for using the card well.

34.9% APR Representative (variable)

Balance transfer cards

Balance transfer cards allow you to transfer balances from other cards, usually at a lower interest rate. Although often sold as a type of card in its own right, most credit cards will allow you to transfer balances, including Aqua cards.

Find out more about balance transfers

Store credit cards

Store credit cards are cards designed for use at a specific retailer or retail chain, offering discounts and other perks when you use the card to make purchases. 

Bank loans

Banks offer a variety of different loans depending on what you want to use the money for. These are generally paid off in monthly instalments over a fixed period. Some of the most common types of loan are:

Personal loans

Personal loans allow you to borrow an agreed amount to spend on whatever you want and pay it back with interest over a fixed period.

Mortgages

Mortgages are loans that are used to buy property. They are secured against a property and are usually paid off in monthly payments over an extended period, usually around 25 years.

Debt consolidation loan

A debt consolidation loan is a form of personal loan where the money is used to pay off existing debt, resulting in one fixed monthly repayment rather than having to repay multiple creditors.

Payday loans

Payday loans are short-term, high-interest loans designed for people on low incomes to bridge the gap between salary payments. Payday loans have earned a bad reputation for putting people into financial difficulty due to their extremely high interest rates.
It’s generally best to avoid payday loans, as most other forms of credit are likely to charge less in interest.

Student loans

Student loans are designed to help students pay for their university courses and other aspects of studying. In the UK, the Student Loans Company provides Tuition Fee Loans, Maintenance Loans and Postgraduate Loans, which don’t need to be repaid until you earn over a specified amount of money each year. 

Overdrafts

An overdraft is a facility on a bank account that allows you to withdraw more than the balance of the bank account. Overdrafts generally need to be pre-agreed with your bank and have a limit, depending on your account history and needs. 
They are helpful in providing a safety net to cover a short-term need for extra money or to compensate for a temporary lack of cash flow. Like most other forms of credit, overdrafts often charge interest depending on how you use them.

Other types of credit

Other types of credit you might come across include:

Hire Purchase Agreement

With a hire purchase agreement, you "hire" an item from the owner by paying regular instalments over a fixed period. You then have the option to buy the item. The main thing to remember is that you don’t own the item until you’ve paid all the instalments. 
If you don’t make the repayments, you’ll have to give back the item. Until you’ve bought the item, you need the owner’s agreement to sell or dispose of the item. This type of finance is quite commonly used to buy cars.

Conditional sale

A conditional sale is similar to a hire purchase agreement, except that you automatically own the item once you have paid all the instalments. This type of finance is also often used for car purchases.