Credit
Understanding credit
Credit is what you get when you borrow money from a credit provider, and it's important to understand how credit works so you can make the right choices. You will see numerous offers for different types of credit, such as credit cards, store accounts, mortgages and personal loans. Sometimes it can be difficult to know which you really need.
If you don't fully understand the risk of having too much credit it can soon get out of hand and you are facing debts you can't afford to pay back. Having credit certainly makes life more convenient but you need to understand how to manage it properly to gain the benefits.
Borrowing money on credit
Every time you use your store card, credit card, rewards card or any loan in reality you are borrowing money from a lender. Such loans are bound by contracts, which means they need to be paid back, or there are consequences.
Time frames for repayment vary depending on the type of loan. A mortgage can be for up to 30+ years, a personal loan can be 1 to 7 years, and credit cards vary with monthly repayment cycles that require at least a minimum payment.
Credit cards allow you more flexibility; given you can continue adding credit, until your limit is reached without having to pay the balance in full. But this where the danger lies, as the longer your balance is outstanding the more interest accrues, thereby increasing your debt.
If this starts to get away from you, one option to consider is a credit card balance transfer, to bring it back under control.
Fees, charges and interest
Whatever reason you borrow money for, there will be a cost involved, whether it is fees, charges or interest. These can often catch you unawares and it's important to check what costs will be applied when taking out any form of credit.
Types of interest
- Fixed interest is a set rate that stays the same throughout your loan period.
- Variable interest, whilst generally lower than the fixed rate, can very during the term of the loan.
Interest free days
Many credit cards offer interest free days up to 55, meaning if you pay for your purchase in full within 55 days you won't pay any interest on that purchase. Credit cards without any interest free days generally have a lower interest rate.
Credit fees
There are numerous fees that get added to your card, which you often don't notice until they have built up. Some of the most common ones are:
- Administrative account-keeping fee
- Annual fee
- Application fee
- Cash advance fee
- Dishonour fee
- Establishment fee
- Early termination fee
- Merchant fees
- Government charges
- Overdrawn account fee
- Late payment fee
The above list should give you an indication of fees to be aware of when making your choices about selecting credit. On a final note, read the small print of all loan contracts before signing.
