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 pay for something without using your cash or savings in a bank account. There's a limit to what you can borrow (called your credit limit) and you have to pay it back.

A credit card can be a great help or a real pain in the pocket. There are so many deals and choices out there, it's easy to get overwhelmed and grab the first credit card that comes your way.

Spend some time shopping around and compare offers and work out what you want. Read our tips on choosing a credit card.

A credit card can make impulse buying easy, but be careful you don't over do it. Try to pay as much off your balance each month as you can and don't just pay the minimum. This will reduce how much interest you pay.

Video: Using credit seems so easy

Using credit seems so easy video

Getting and using credit can be very easy, but it comes at a price. Watch this video for some tips and tricks on using credit.

Store cards

Most store cards are offered by department stores and other retailers. Store cards 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 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.

Be careful when you get a store card as part of an interest-free deal. You might pay more in interest than a regular credit card if you don't pay it off in the required time.

Personal loans

These can be useful for buying one-off big items like a car or paying for a trip overseas. They usually have a fixed term such as 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. This is unlike a credit card where you can make minimum repayments only, and so the debt may last for 10, 20 or 30 years.

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.

The 100-inch flat screen TV you buy may end up costing you a lot more than you thought if you don't pay it off within the interest-free period which is often only 12 to 24 months.

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.

If this is an option at the checkout, and you choose this payment method, you will have to provide credit or debit card details the first time you use it, just as you would for standard purchases. No interest is charged but you will incur late payment fees if your scheduled payment is rejected. You may also incur administration or payment processing fees.

Before you use this payment option, make sure the fortnightly payments are amount is affordable and in your budget.

Home loans

A home loan will generally be used to buy a house or block of land for a large sum of money and over a longer period of time than other forms of credit - usually 20 years or more. The interest rate on a home loan is generally lower than other types of credit.

There are many different types of home loan so make sure you get some help to understand what's on offer. Find out more about home loans.

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.

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Last updated: 03 Apr 2018