Credit and debt
Credit is money you borrow from a financial institution, like a
bank or credit union, to spend the way you want. You need to repay
this debt to the credit provider - usually with extra costs on top
of the amount you borrowed.
Here we explain how different types of credit work, things to
consider before you sign up for credit and where to get help if you
get into debt.
Types of credit
There are many types of credit products for different purposes.
Each one gives you access to funds, but you have a legal obligation
to repay the money - generally with interest.
A credit card allows you to borrow money from a credit provider
to buy something without using your cash or savings. There's a
limit to what you can borrow (called your credit limit) and you have to pay it
A credit card can make impulse buying easy, but be careful you
don't overdo it. Pay as much off your balance each month as you can
- don't just pay the minimum, as this can mean years of repayments
and cost a lot more than you might think. If you can, pay the
entire amount owing by the due date to avoid being charged
Don't forget that even if you've paid off all you owe, if your
card has an annual fee, you'll still have to pay that each
Work out how you can pay off your card faster and how much you
Credit card calculator
Some department stores and other retailers offer store cards.
These can get you discounts, earn you reward points and provide
short-term financing on major purchases. But they can get you into
a lot of debt if you don't use them wisely, as the interest charged
on them is often higher than other credit cards.
Before you get a store card:
- Check the fees - You can be charged annual
fees, penalty fees and service fees.
- Check the terms and conditions - Speak to
someone who can help you understand what you are signing.
- Limit the number - Don't sign up for more
cards than you need.
These can be useful for buying one-off big items, like a car, if
you don't have enough money saved up to pay for it. Personal loans
usually have a fixed term, like 2 or 5 years, meaning you have to
pay back the money within that time.
Regular repayments are set to ensure you pay off the debt in the
term provided. Having a set repayment amount can help with
budgeting because you have to make regular payments and it may be
cheaper than using a credit card.
Read more about personal loans.
Many stores offer interest-free deals that let you take the
goods home before you've fully paid for them. This sounds great,
but they are not cost free - there are still fees and charges you
Here's how it works: if the purchase balance is not paid in full
within the interest-free period, interest will be charged on the
outstanding amount, usually at a high interest rate.
When you enter into one of these deals, you often also receive a
store card which will come in the mail and give you access to more
credit. If you don't need extra credit, then don't use the card.
Read our interest-free deals webpage.
Interest-free online shopping
Some online retailers allow you to shop now and temporarily
delay payment, either until you receive your goods and are happy
with them, or by allowing you to pay by instalments over a short
period of time. These interest-free online shopping payment
services are offered by separate companies to the retailer.
See our page on buy now pay later
Payday loans are for $2,000 or less and you have between 16 days
and a year to pay them off. The cost of a payday loan is generally
higher than for other loans.
Find out more about payday loans.
What to do before you borrow
Before you start looking for credit, do a budget. The amount you
can borrow and repay will depend on your income, expenses
and estimated repayments.
Keep in mind that your ability to make repayments might change
in the future - your income could drop for some reason, or your
expenses might increase (for example, your rent or medical
Work out how much your repayments will be by using one of
MoneySmart's loans, credit and debt
Check if you're getting the best credit deal
Credit providers are always looking for new business, so make
sure you shop around to get the best deal you can. If you were
looking for a car, you wouldn't buy the first one you see. It's the
same when you borrow money: compare different credit providers,
their products, features, fees and charges.
For some types of loans and credit products, an ad that includes
the interest rate must also show you the 'comparison rate'. This is the interest
rate plus most of the fees and charges you must pay on a loan. It
will give you a better idea of how much a loan will really cost
But remember, the comparison rate is just an example for a
particular size loan - it may be different for the amount you want
to borrow. Here is more information on comparison rates.
Read the credit contract
Before you sign up for credit, make sure you read the contract.
It's essential to know what you're signing up for, who you're
getting the credit from and how much they are charging you.
If you don't understand the credit contract, ask someone to help
you understand it. You may know someone else who has good knowledge
about contracts - it could be a relative, a teacher or someone at
work. Never sign anything you don't understand. You may not be able
to cancel a contract just because you change your mind.
Find out more about credit contracts.
A credit reporting agency will have a credit report on you if you have:
- applied for a personal loan or credit card in the past 5
- signed a mobile phone contract
- paid a bill at least 60 days late (that debt can be as little
It's a good idea to check your credit report every year to guard
Your credit report includes your personal details, information
about the credit products you have and the credit applications
you've made, as well as whether you've been making your repayments
on time. Find out more about your credit report.
Credit providers use credit reports to help them decide whether
to give you credit and they are used to formulate your credit score.
If your credit report reveals a poor repayment history, a credit
provider may consider you a high credit risk and not lend you
Getting help with debt
If you're having trouble repaying your debts, it's important to
act quickly. If you ignore the problem and don't pay what you owe,
you could end up with legal problems or a bad credit report, which
could affect your ability to borrow money again.
If you need help with your debts:
- Contact your credit provider straight away -
You may be able to organise an agreed repayment plan until your
debt is paid off or a temporary financial problem is resolved.
- Get help from a financial counsellor -
This is a free and confidential service.
If some of your financial problems are due to someone else
running up debts in your name, or pressuring you to spend money or
sign up for a loan, you may be experiencing financial abuse. Visit
abuse webpage for a list of organisations that can help.
For more tips on what to do if you're struggling with
repayments, see our page on trouble with debt.
Getting into debt is easier than getting
out of it, so before you get a loan or use credit, make sure you
understand what you're signing up for. If you struggle with your
repayments, get help immediately.
Last updated: 05 Dec 2018