What is credit?
You may want to go on a holiday or buy a new car but you haven’t got the cash.
One way to get things you want now is with credit. Credit is the promise to repay, plus interest, money borrowed from another. Examples of credit include housing loans, credit cards, personal loans and store cards.
Credit providers or lenders include banks, credit unions, finance companies and other businesses.
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Shopping for credit
Before shopping for credit you should ask the lender or credit providers for the following information:
- The interest rate(s) applicable
- How the interest is calculated and when it is charged
- The amount of fees and charges payable
- Details of any commission.
You can use this information to compare different credit products.
Hints on choosing credit
- Shop around — this can save you money
- Don’t automatically take the credit suggested by a sales person. It may not be the best deal for you
- Check out the interest rates offered by different lenders such as banks, credit unions, building societies and other businesses
- Don’t fall for low interest rates without checking out the fees and charges. It may work out to be more costly
- Don’t sign anything unless you are sure of the credit that is being offered.
A credit contract is a legally enforcable document. Read all the documents carefully and don’t be pressured to sign there and then — there is no need to.
Budgeting
Managing credit or simply covering expenses is not always easy.
A budget can help you plan for your expenses. It involves adding up your earnings each week (or fortnight or month) and subtracting the amount that you spend on essentials. Examples of essentials are rent, food, phone/electricity/water bills, petrol, fares and loan repayments. The amount of money that is left can be used to buy things that you want or you can save it.
You should include yearly expenses such as car registration and insurance in your budget. You can divide these totals by 52 for the amount to budget for each week (or divide by 26 for the amount to budget each fortnight or by 12 if your budget is calculated on a monthly basis).
Before you sign a credit contract
The law provides that lenders must give you the following written information before you sign a credit contract:
- The credit provider’s name
- The amount of credit that is to be provided
- The annual percentage rate(s)
- How interest is calculated and when it is charged
- The total amount of interest if the loan is paid within 7 years
- Any enforcement expenses that may become payable
- Credit fees and charges
- How you will be informed of changes to the contract
- Any default rate of interest and how this is calculated
- How often statements will be provided
- Commission charges
- Any related insurance that is financed under the contract.
