Borrowing money - Obtaining and managing credit

Almost all of us rely on borrowed money at some point to achieve a financial goal – whether it’s buying clothes or a DVD player with a credit card, or taking out a loan to buy a car, a business, or a house. In fact, without some form of credit, many of life’s bigger purchases would be unattainable. But to make borrowed money work for you rather than against you, it’s important to keep credit under control. This fact sheet outlines the ins and outs of obtaining and managing credit.

What is credit?

Credit is borrowed money that allows you to buy goods or services now, but pay for them later. Credit cards (such as those offered by banks and other financial institutions), store cards (which allow you to purchase in specific stores or retail groups), personal loans, lay-bys and mortgages are all forms of credit.

What credit does my bank offer?

Most banks in Australia provide all of the most commonly used forms of credit, including credit cards, personal loans, business loans and mortgages. Contact your bank to see what options they have available.

Why use credit?

Credit can be a convenient way to purchase goods and pay for them over an extended period of time – especially larger items that we generally can’t afford to purchase on the spot. For example, a personal loan can make it possible to buy a car, and then pay it off in instalments over a few years. Credit cards can also be a convenient form of credit – they provide a number of benefits including 24-hour access to money, the ability to shop online, and access to money in emergencies. You need to be aware that using your credit card to access cash - a cash advance - can attract a fee and interest can be charged from the day you make the withdrawal.
The cost of credit

Borrowed money comes at a price – interest is calculated on the amount of money you have borrowed (or the amount you still owe), and is then added to the total amount you must pay back.

Generally, the more money you borrow and the longer it takes to pay it off, the more you will have to pay in interest.

The type of interest can vary depending on the product and the bank. Two forms of interest commonly applied to personal loans are:

Fixed interest - a set interest rate which does not change over the term of the loan;

Variable interest - an interest rate that can go up or down over the term of the loan.

Interest on credit cards also differs. Some cards offer interest-free days, others offer ongoing interest:

Interest-free days - a set number of days (up to 55 days), before interest is payable on your purchases. If your purchases are not paid off in full by the end of the interest-free period, interest then applies to the entire balance owing;

Ongoing interest - an ongoing rate of interest which usually applies from the date you make the purchase. Generally, these cards have a lower interest rate than those with interest-free days.

Low interest and no interest

Sometimes you may see loans or credit cards offering low interest, or even no interest, for a fixed period of time (for example, for six months or one year). Most often these offers are made by retailers, in particular for store credit. Some of these offers provide good opportunities for consumers. However, some also come with a catch, such as significantly higher interest once the initial ‘honeymoon’ period is over. Always read the product information and terms and conditions very carefully before entering into any arrangements to be sure of what you’ll be paying – now, and down the track. And don’t confuse interest-free with fee-free – fees may still apply, even if interest doesn’t.

Other costs

In addition to interest, other charges usually apply to credit arrangements, such as annual fees on credit cards, or administration fees on personal loans. It is vital to be fully aware of any fees that apply (and interest rates) before entering into a credit arrangement. Your product information will outline all fees, but if there is anything that you don’t understand, call the bank for clarification.

Comparison rate

For consumer credit loans with a fixed term, for example a personal loan, your bank will have schedules available that provide examples of the comparison rate applicable to a loan. The comparison rate is a way of expressing the cost of a loan by combining the interest rates and certain fees and charges into a single percentage rate. The comparison rate does not apply to revolving credit facilities such as credit cards and overdrafts.

It is important that you understand there are some limitations with the comparison rate. Different loan amounts and terms will result in different comparison rates. Some costs such as redraw fees or early repayment fees, and costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate alone should not be used to make your final decision on a product, other factors must also be considered.

Applying for credit

What type of credit is best?

Different types of credit suit different circumstances. As a general guide, credit cards generally have higher interest rates, so they are best used as a short-term credit option for making smaller purchases. Personal loans, on the other hand, tend to have lower rates of interest, and are therefore more often used to purchase larger items that take longer to pay off, such as a car. Bank customers may also wish to set up an overdraft – this arrangement allows your account to go into debit, usually up to a specified limit. In addition, there are mortgages which enable bank customers to access the equity in their home – borrowing money at home loan interest rates which can sometimes be lower than other forms of credit, for example, credit card interest rates.

Credit cards also offer the flexibility to buy goods as and when you require them – up to an agreed credit limit. Personal loans are usually obtained to make a specific purchase, and rigid terms surround the amount borrowed, the purpose and the repayment arrangements.

The type of credit that’s best for you will depend on how you want to use the borrowed funds, and also on your individual financial circumstances. Your bank will be able to provide more information to help you determine which products will best suit your needs (also see our tip on shopping around on page 5 of this fact sheet).

Before applying for credit

Credit is a big responsibility, so it pays to do your sums before applying for a credit arrangement. Do a budget to get a clear understanding of your current financial situation. Can you afford to take on the debt? Can you afford to make the repayments? (Refer to our Handy budget planner fact sheet for more information on how to create a budget).

And don’t forget to think ahead. If your circumstances change – e.g. if you are temporarily out of work, or if you encounter an unexpected expense such as a car repair bill – will you still be able to make the repayments?

Are you eligible?

So, you’ve decided to borrow some money from your bank. How will your bank determine your eligibility for a loan or credit card? Banks typically consider a number of factors, including your employment status, income, savings, existing debts, and your credit report.

What is a credit report?

In Australia, reporting agencies hold credit reports on individuals who have, at some point, applied for credit. If you have applied for a loan, a credit card or even a telephone account, you probably have a credit report.

Credit reports contain information such as the types of credit you’ve applied for and any overdue payments of 60 days or more in cases where you’ve been sent notice of the default and the credit provider has taken steps to recover the amount.

Getting a copy of your credit report

If you’re thinking of applying for credit, it’s a good idea to check your credit history first to make sure the details listed are accurate and up-to-date. Sometimes, the first time people become aware of their credit report is when a loan or credit application is declined, and this occasionally happens as a result of an incorrect listing on your credit report, or an error in your personal details. You can obtain a copy of your credit report (a fee may apply) by applying in writing. Contact Baycorp Advantage on 02 9464 6000 to find out how, or visit www.baycorpadvantage.com.

Managing credit

Credit is a fact of life for most Australians. For many of us, borrowing money helps us work towards and gradually pay off our dreams – whether it’s a holiday, a car, a house or a new business. But from time to time, debts can become a burden, and for some, these times can result in significant financial hardship. The key to ensuring that credit continues to work for you, rather than against you, is careful management. Consider these tips for paying off your debts:

modify your budget to make sure it accounts for your debt repayments;

consider paying off debts with the highest interest rates first, as these can cost you more in the long run;

credit cards require you to pay a minimum amount each month. Consider paying more money than the minimum required so you can pay off your debt faster and pay less interest;

think about consolidating your debts if you have more than one, but only do so if it will help you to minimise your overall interest payments and the fees and charges you pay;

Looking after your interests – the Uniform Consumer Credit Code

The Uniform Consumer Credit Code (UCCC) is a law governing most consumer lending in Australia, designed to protect the interests of consumers through provisions for disclosure, accessibility to useful information and enforcement mechanisms (amongst other things). The UCCC applies to all providers of regulated consumer credit such as banks, building societies, credit unions, finance companies and other financiers.

The UCCC does not cover certain types of credit such as investment and business loans, pawnbroking, some credit that is for a period of 62 days or less and credit provided without any prior agreement, for example, when a cheque account becomes overdrawn but there is no agreed overdraft facility.

In accordance with the UCCC, your bank must tell you about your rights and obligations when entering into a consumer credit contract with them, and provide you with a written document that includes information about the amount of credit, interest, credit fees and charges, repayments and any mortgage or guarantee.

Shop around

Every bank is different, and most banks offer a range of options when it comes to borrowing money. Don’t just take the first product you hear about – instead, take the time to find out about the products they offer. Then, compare the results of your search and select the product and the bank that you feel best suits your needs.

Dealing with a problem debt

Contact your bank: If you can no longer afford the repayments on a loan or credit card, the first thing you should do is contact your bank. Once your bank is aware of the problem, they may be able to negotiate a different repayment schedule to help you make your payments – but make sure you alert them to the problem early.

Financial counsellors: If you can’t resolve your debt situation, a financial counsellor may be able to help you. Financial counsellors work with you to develop strategies to manage your money and work out repayment plans.

Don’t ignore the problem: Never ignore a problem debt – it won’t go away on its own. The sooner you deal with the problem, the sooner you will get on top of the situation and work your way towards a more manageable financial situation.

Code of Banking Practice: The Australian Bankers’ Association (ABA) recently revised its Code of Banking Practice which is the banking industry’s customer charter on best practice standards. If your bank has adopted the Code, there is a commitment by your bank, that with your agreement, the bank will try and help you overcome your financial difficulties with your bank loan.
once you’ve paid off a debt, keep setting aside the repayment amount to help reduce other debts faster.