Using credit

Every now and then you may have unexpected expenses or find yourself a bit short of money. Credit can help you through a temporary money shortage - if you use it sensibly.

Can you afford to borrow?

Before you start looking for credit, do a budget. The amount you can borrow and repay will depend on:

  • Your income
  • Your expenses
  • Your estimated repayments

Here is how to work out what you can afford to borrow. 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).

Shop around for credit

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.

Here is how to get the best credit deal.

Comparison rates

For some types of loans and credit products, an ad that includes the interest rate must also show you the 'comparison rate'. The comparison rate 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 that the comparison rate will just be 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.

Using a credit card

When you get a credit card you will receive a monthly statement that shows your purchases, the total amount you owe, the minimum amount you must pay and other information.

If you pay the entire amount owing by the due date, you generally won't pay any interest. If you pay less than the entire amount, you will be charged interest.

Paying back your debt by making only the monthly minimum payment can mean years of repayments and cost a lot more than you might think. Your monthly statement will show you how many years it will take you to repay the debt if you only make the minimum monthly repayments.

Don't forget that even if you've paid off all you owe, you'll have to pay your card's annual fee each year if it has one. Find out more about credit cards.

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

Credit card calculator

Video: Steve gets his first credit card

Steve gets his first credit card video

Steve decides to take his girlfriend overseas for a holiday, but gets himself into debt on his credit card and then loses his job so he can't make the repayments. Watch the video to see what happens to Steve.

Be wary of credit offers

If you get an offer of more credit, be wary. See credit offers for more information on credit limit increase invitations, honeymoon rates, cash back offers and balance transfers.

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 holds your personal details, information about your credit applications and if you have been more than 60 days late making a repayment.

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 history of repayment, they may consider you a high credit risk and not lend you money. Find out more about your credit report.

Case study: Giorgos can't get a loan

Desperate to get a new car, Giorgos searched online for the best deal on a car loan. He applied for a few loans but he got knocked back. Disappointed, he made a few phone calls to complain and found -  to his complete surprise - that he was a bad credit risk.

He ordered a copy of his credit report, which showed he was over 60 days late making a number of credit card repayments. He hadn't realised at the time that this would affect his future loan applications.

Signing a credit contract

Before you sign up for credit you should 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, get help from someone to understand it. A financial counsellor is a good person to ask for help. You may also know someone else who has good knowledge about contracts - it could be a relative, a teacher or someone at work.

Do not sign anything you don't understand. You may not be able to cancel a contract just because you change your mind. Here are some tips on credit contracts.

Related links

Last updated: 25 Oct 2018