Header Image

Credit vs savings

 

Managing your finances can be difficult, especially when unexpected expenses occur. Making purchases on credit either via a credit card or a loan can be a useful way of breaking up big payments over several months, as well as helping you to build up a credit history.

Despite the benefits, there can be risks with taking on credit, for example using credit can accrue interest or could damage your credit score if not managed properly. We’ve analysed some common purchases to demonstrate the costs and pay back times when buying on credit compared to saving up to make your purchase based on a specific audience.

Credit Card Uptake

    

Year on year credit card uptake

   

Our data suggests the prevalence of credit cards has been growing since 2016, based on an increase in the number of people that have been using our credit card eligibility and comparison search between January 2016 and February 20191.

Buying things with a credit card, with a loan, on finance or even getting a mortgage are all forms of borrowing, and it’s quite commonplace in the world of personal finance. In many cases you will use a combination of saving and borrowing. This might be saving for a deposit and borrowing the rest, or borrowing up front and saving to pay off the debt.

Managing your finances properly is important, and it’s never a good idea to borrow more than you can afford to pay back during the agreed time period.

   

How long does it take to pay off or save?

 

Credit - To calculate the credit amount we used data from a subset of 12 top rated credit cards available on our site. All cards have been assumed to pass 0% APR limiting periods, and the average representative variable APR was calculated at 26.4 per cent.

Time to pay off has been represented in months and repayment amount has been calculated based on average income minus cost of living representative of an average UK adult, taking a median of Birmingham and London for someone sharing mortgage payments on a 1 bed flat with one other person. Paying off more than the minimum monthly repayment will help you to pay off your balance faster, and setting up a direct debit means you won’t forget a payment.

Saving - Saving is calculated based on the same rationale for the average UK adult (average income minus cost of living, taking a median of Birmingham and London for someone sharing mortgage payments on a 1 bed flat with one other person) with the savings amount based on available money left over per month which is calculated as £352.32. The savings assume this full amount will be saved per month to make the repayment.

 

Cost  Time to Save (months) Time to Pay Off Credit (months) Interest on Credit Payment Total Credit Payment (Maximum Average Payments)
£200   0.6 1 £0 £200
£300                                 0.9 1 £0 £300
£400                                 1.1 2 £9 £409
£500                                 1.4 2 £13 £513
£600                                 1.7 2 £17 £617
£700                                 2.0 3 £21 £721
£800                                 2.3 3 £27 £827
£900                                 2.6 3 £34 £934
£1,000                                 2.8 3 £40 £1,040
£2,000                                 5.7 7 £143 £2,143
£3,000                                 8.5 10 £320 £3,320
£4,000                                11.4 13 £577 £4,577
£5,000                                14.2 17 £931 £5,931

   

*time to save/pay off credit is in months based on an average monthly amount left after bills of £352.32, interest is calculated based on a representative APR of 26.4% - these rates may not represent your financial situation and the products available to you and you should never borrow more than you can afford both now and in the future’.  

Your personal financial situation will inform what options are best for you when making a purchase; taking on debt should not be done lightly and you need to be happy you can afford to borrow the money and be disciplined about paying it back. However, saving may not always be the most suitable option, particularly if a purchase is unexpected or needed right away.

Based on an average UK resident[1], we have analysed the time and total cost, including interest, of making purchases from £200 up to £5,000.

The average UK resident2 would, for example, need to save for 3 months to make a purchase of £1,000. If they were to make that purchase immediately via a credit card, it would take three months to pay off this bill. In that time £40 worth of interest will have accrued, making the total payment £1,0403.

Making payments for work

 

Career purchases

   

There are number of purchases you may need to make as part of your working life, this could range from a rail ticket to a smart pair of shoes.

Some upfront purchases, using credit, could be beneficial.  For example, the upfront purchase of the average season ticket for train travel4 with a credit card, if you don’t have the savings already, might cost you around £8 in interest.

But by delaying this purchase to save the money and purchasing a series of tickets could end up costing you more in the long run. The savings made by avoiding the purchase of individual tickets could make the interest payment negligible if managed correctly. If you need to buy a season rail ticket, it’s worth checking with your employer to see if they offer an interest-free loan. If you employer won’t help and the season ticket is so expensive you need all year to pay it off, a personal loan might a better option.

When it comes to a smart set of shoes, if on the pricier side these could work out more efficient if bought on card. A purchase of this size is unlikely to accrue any interest if it is paid off in full, if you cannot pay off in full then saving is the more suitable option. If you are considering a heftier purchase, such as an expensive suit, it makes more sense to save up and avoid paying unnecessary interest.

  

   

Lifestyle purchases and payments

    

Lifestyle purchases

   

A student loan is generally considered to be positive debt and it is not a good idea to pay this cost on a credit card as card interest rates are much higher than the loan.

There are two different kinds of government student loan. The first is a maintenance loan, which is there to help cover your living costs, such as your accommodation, food, and so on. You get more if you live away from home as you’ll be paying rent. As well as the maintenance loan, there is the tuition fees loan, which covers the cost of your tuition fees. You will need to start paying this back the April after your course finishes.

At the other end of the scale, a winter coat that you can afford to pay off in your very first credit card bill will help build your credit rating while accruing no cost in interest.

   

Sport purchases

    

A football season ticket5 can be expensive and hard to pay for in one go from savings, but this is likely the more cost effective option, especially since football seasons are easy to plan for.   Planning ahead is key to ensure you have the funds when you need to purchase these expensive items.

Paying for a season ticket for a premier league team on a credit card could accrue an extra £27 of interest (or roughly the same price as one away game ticket). Using a credit card to buy a new pair of trainers on the other hand is unlikely to accrue any interest at all if paid off in full within the month.

If you are looking into a football season ticket, make sure to check with your club for any finance options they may offer.

   

Buying tech such as phones and laptops

    

Technology purchases

   

High-end tech such as laptops and smart phones represent some of the biggest purchases for many people.

A high-end smart phone such as the iPhone could cost you nearly £50 in interest based on our example if paid for outright on a credit card. So if your circumstances are similar and you don’t want to build up interest on a pricey phone or laptop, you might want to save up.

A cheaper laptop or a designer watch, however, will only end up costing about £15 more or nothing at all in accrued interest, respectively, meaning purchasing these items up front via a credit card might be a more preferable option.

Retailers often offer finance options for smart phones or laptops, so it’s worth exploring what’s out there if you’re considering this type of purchase.

    

  

Paying for a wedding

   

Wedding purchases

    

It’s no secret that paying for your big day can be a pricey affair, so it makes sense to split the costs up as much as possible.

Our analysis suggests saving up for expensive purchases such as the dress and photography to be the most cost effective option, whilst using a card for comparatively cheaper payments like the cake and the groom’s outfit could help to manage costs.

Paying for the venue could be a lot cheaper if paid for from savings, but you may also wish to consider the security of a credit card, which is likely to cover you in the instance that the venue falls through and you need to cancel the payment. You can then pay off the credit card from savings to avoid paying any interest. Credit Card purchases between £100 and £30,000 are protected.

A wedding loan may also be a sensible option when balancing the cost of a wedding day, but as with a card, you should be aware of the potential impact of taking on additional debt.

In summary saving for items is preferable to borrowing and will cost you less.  However, cards may be useful to protect you and save you money around certain types of purchases.  But as always you need to ensure you pay it back and on a regular basis.  Any missed payments will incur fees and are likely to damage you credit score.

   

Top tips for managing your finances

Your personal financial situation will inform what options are best for you when making purchases. Choosing to take on debt in the form of credit should be undertaken based on full understanding of the options. As always you should not take on debt unless you are confident you can pay it back.  There are however a number of tips that can help you get a handle on managing your finances

Check your credit rating and score.

Your credit score is a rating based on your financial history. Credit referencing agencies give you a score based on how well you have managed your financial accounts in the past, however if you have never borrowed before you might find your score to be low or non-existent.

Finding out your credit score lets you know where you stand in the market and you can check it for free with MoneySuperMarket’s unique and personalised credit score proposition Credit Monitor.Credit Monitor gives you tips and hints on how to improve or maintain your credit score and also gives you access to credit cards that you’re likely to get.

Know whether you're eligible for a specific card.

You can use Credit Monitor a unique and personalised credit score proposition or the MoneySuperMarket eligibility checker to identify cards you're eligible for before you apply. 

Only make applications for credit cards you think will be accepted or for which you're pre-accepted.

This helps you to avoid having to make several applications in a short space of time, which can have a negative effect on your credit score.

Use "credit builder credit cards" to improve your credit score.

These are designed to build your credit score. Credit builder credit cards usually have higher interest rates, but help you become eligible for better credit cards later on.

Use a cashback card if you're able to pay off your card consistently.

By doing so and not generating credit card debt, you can earn money back at the end of the year.

A 0% balance transfer card can help you deal with outstanding debts or overdrafts.

This type of card allows you to move money to other accounts and pay off debt.

Pay more than the minimum repayment.

The more you can repay, the less interest you'll have, and the faster you'll pay off your credit card debt

Paying off your entire balance each month is the best option.

You will gain no interest on your payments and gain all of the advantages of your credit card.

For more tips on how to make the most of your credit card visit our 10 credit card tips guide.

MoneySuperMarket is a credit broker and not a lender.

Ready to compare credit cards?

Whatever type of credit card you're looking for our Eligibility Checker can help.

Find a card

 

Sources & Methodology

1 Based on click out from our Smart Search journey Jan 1st 2016-Feb 2019. 2019 projection based on current rate of usage, click outs are used as a proxy for interest and do not necessarily represent successful purchase

2 Cost of living has been calculated using data from Numbeo and created using a median of Birmingham and London, for people sharing the mortgaging a 1 bedroom flat with one other person.

3 All cards have been assumed to pass 0% APR limiting periods, and representative variable APR has been used. Months to pay off credit refers to the total number of credit bills paid. Maximum repayment has assumed to be equal to average salary minus average cost of living.

4 Football season ticket prices have been drawn from an average of all team's cheapest option for the Premier League 2017-2018.

Credit cards have been considered better in cases where the final cost is less than 3% more than that of savings. This 3% figure represents the median interest on any payments up to £5,000 where the maximum available repayment is made each month. The calculations assume the purchase discussed is the only credit used on the card. Buying several items mentioned at the same time would increase the time taken to pay off the credit card debt and make the interest paid significantly more expensive.

Credit - To calculate the credit amount we used data from a subset of 12 top rated credit cards available on our site. All cards have been assumed to pass 0% APR limiting periods, and the average representative variable APR was calculated at 26.4 per cent.

Time to pay off has been represented in months and repayment amount has been calculated based on average income minus cost of living representative of an average UK adult, taking a median of Birmingham and London for someone sharing mortgage payments on a 1 bed flat with one other person. Paying off more than the minimum monthly repayment will help you to pay off your balance faster, and setting up a direct debit means you won’t forget a payment.

Saving - Saving is calculated based on the same rationale for the average UK adult (average income minus cost of living, taking a median of Birmingham and London for someone sharing mortgage payments on a 1 bed flat with one other person) with the savings amount based on available money left over per month which is calculated as £352.32. The savings assume this full amount will be saved per month to make the repayment.

https://www.moneysupermarket.com/credit-cards/calculator/

https://www.barclaycard.co.uk/personal/credit-cards/interest-calculator/

https://www.ons.gov.uk/

Find this helpful? You can share this article