Choosing the right type of credit for you
Credit cards and personal loans are the most popular forms of credit. It’s important to think carefully before you sign up – be certain that the debt is necessary, and that you can easily manage the repayments.
Credit cards are great if can pay them in full at the end of the month. They can also be used for buying things online like concert tickets or books.
Interest rates on credit cards are often higher than personal loans. So it’s important to use them with caution and treat them as actual money. That way, you won’t spend more than you can afford.
If you’re looking for a credit card, here is a list of features to look for.
- Competitive interest rate.
- Interest free period – credit card statements have a monthly cycle. If your credit card has a 55-day interest free period, you get 55 days without being charged for your purchases (if you buy on the first day of the statement cycle). If you buy at the end of the cycle you’ll have fewer interest free days. Many cards have a 44-day interest free period, so your payment may be due soon after your most recent purchases.
- Annual fee – some cards have an annual fee, and others don’t. Watch out for hefty annual fees.
- Be careful with rewards cards – they’ll usually charge you an annual fee plus an annual rewards fee.
- Minimums and penalties – make sure you know all about minimum monthly repayments and find out if there’s a penalty fee if you don’t pay the minimum.
For many people, it’s impossible to pay for a major purchase (like a car, overseas airfare or boat) without borrowing. Personal loans are a good option for major purchases, because they often have a lower interest rate and a longer payment term than a credit card.
Shopping for a personal loan
These hints might help you find a loan that suits you.
- Make your own decisions – don’t borrow on a friend’s advice. A purchase that works for them may not work for you.
- Know your limits– it’s a good idea to get a verbal appraisal for a loan before you buy. This will give you more bargaining power too.
- Make sure your borrowing is in line with your goals.
- Buy what you can afford – don’t put pressure on yourself to make massive repayments. Work out how much you earn (after tax), how much you spend per month and what you can easily afford to repay (putting money aside for emergencies and socialising).
- Don’t be bullied – never let a pushy salesperson rush you into anything.
- Take your loan repayments directly out of your pay – what you don’t see you won’t miss.
- Avoid impulse purchases – take your time when making a big decision such as buying a new car.
Control your repayments
There are advantages and disadvantages in making extra repayments on your loan or your credit card. If you’re thinking about making extra repayments, look carefully at your financial situation before you do it.
Making extra repayments will:
- pay off your debt faster
- potentially save you interest.
You also need to be aware that:
- some financial institutions may charge fees if you pay your loan off early
- if you have a fixed rate home loan, you may have restrictions – your financial institution will tell you if you can make extra repayments without additional fees.
For more information on managing your credit, read this practical guide: www.abacus.org.au/images/stories/publications/take-control/credit_wise_2008.pdf