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.

Credit cards

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 back.

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 interest.

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 year.

Work out how you can pay off your card faster and how much you can save. 

Credit card calculator

Store cards

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.

Personal loans

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.

Interest-free deals

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 must pay.

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 services.

Payday loans

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 money

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 expenses).

Work out how much your repayments will be by using one of MoneySmart's loans, credit and debt calculators.

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 you.

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.

Credit reports

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 years
  • signed a mobile phone contract
  • paid a bill at least 60 days late (that debt can be as little as $100).

Smart tip

It's a good idea to check your credit report every year to guard against identity theft.

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 money.

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 our financial 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. 


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Last updated: 05 Dec 2018