What is credit?

Credit is a promise to repay, with interest, money borrowed from another. Credit comes in many forms such as credit cards, personal loans and interest-free loans from a variety of places including retail stores, banks and other financial institutions.

What should I consider when looking for credit?

Here are some tips to help you make better borrowing decisions:

• Don’t automatically take the credit suggested by a salesperson or car dealership. Shop around for the best deal.
• Work out the real cost of buying on credit. How much extra will it cost?
• Don’t take out a loan for longer than you need it. Calculate how quickly you can pay it off and the most you can repay each month but note any early payout penalties that may apply.
• Check your budget carefully and make sure you really can afford to make the repayments. If you have unexpected financial commitments will you be able to manage?

How do I know if I am getting a good deal?

When looking around for credit ask for the following information:

• the interest rate(s)
• how the interest is calculated and when it is charged, especially on ‘interest-free’ loans
• any fees and charges
• repayment amounts and the term of the loan
• a comparison rate for fixed term product.

Check the credit deals offered by different lenders, such as banks, credit unions, building societies and other credit providers (you may get a better deal elsewhere).

What is a comparison rate?

A comparison rate is a rate which includes both the interest rate and certain fees and charges relating to a loan, reduced to a single percentage figure. Information on comparison rates will assist you to identify the true cost of the loan. All credit providers, finance brokers and linked suppliers (suppliers of goods and services who refer customers to particular credit providers) must give you information about comparison rates for any loan for personal, domestic or household purpose that is repayable over a fixed term. A comparison rate must also be included in any advertisement for fixed term credit which contains an interest rate.

What is a credit contract?

A credit contract is a legally enforceable document for obtaining credit. Take the time to read it and any other documents associated with credit carefully and don’t be pressured to sign anything on the spot.

Can I be sent a credit card without requesting it?

No. Financial institutions are not allowed to send you a credit card or store card unless you ask for it.

What is a credit limit?

When you apply for a credit card, the card is given to you along with a credit limit, for example $2,000. You can spend up to that limit.

What happens if I exceed my credit limit?

Some credit providers may allow you to exceed your credit limit. This is not a ‘free gift’ and will most likely attract ‘over limit’ fees and charges, which will become payable in addition to your normal monthly payment in your next statement period.

Will paying with credit cost me more than paying with cash?

Purchases paid by credit card will generally cost you more than paying cash because of the interest charges that will apply. Also, the trader may impose a surcharge on credit card transactions. Not all traders choose to do so, but when they do there must be clear, prominent in-store and/or
point-of-sale signage.

Remember, if credit payments are not made when they are due, late fees may need to be paid, items can be repossessed, wages garnisheed and your credit record could be blemished.

What happens if I only make the minimum monthly repayments?

Paying only the minimum amount will end up costing more because of the interest involved. Most loan accounts, including credit cards, have the interest calculated on the daily balance and debited to the loan monthly. Increasing the amount of monthly repayments will leave a lower balance on which interest is calculated.

Example: It will take 95 years to clear the debt of a credit balance of $3,000 at a 17.5% annual interest rate paying only the minimum payment each month.  This would be calculated at a 1.5% minimum rate for payments and include no additional purchases.

What is an interest-free period?

Some credit cards and store cards offer
interest-free credit for up to 55 days. Interest becomes payable 25 days after the account has been posted to you. If you buy at the beginning of the billing period and pay the full amount by the due date, you will have used the credit free of interest. Not all credit cards offer interest-free periods. Where they don’t, you pay interest from the day the purchased item is recorded on your account. Cash advances accrue interest from the date the money is provided to you.

What debit card should I get?

Debit cards allow you to withdraw your money from your bank account. Some debit cards limit you to the amount in your account. Other cards allow for a line of credit which means that you can overdraw your account up to an agreed credit limit. Make sure that you understand all the terms and conditions of the account. Fees may be charged for transactions so make sure that you know how many you can make before you are charged for them. Always make sure that when you receive your bank statement you read it carefully and that there are no mistakes on the statement.

What sort of loan would suit me?

The first thing to check when deciding on a loan is whether a variable or fixed rate of interest applies. A variable interest rate will move up or down, depending on the market. You should ask how and when the interest rate will be varied under the terms of the loan contract. A fixed interest rate remains the same for a set period of time and this must be stated in the credit contract.

A fixed interest rate loan gives you greater control over your finances because the repayment amount remains the same for the fixed interest period.

However, generally with fixed interest rate loans you will not be allowed to make more than the agreed repayments (and therefore pay off the loan quicker) without incurring a penalty.

How can I consolidate my loans?

Some lenders offer consolidation loans which allow you to group together smaller loans, which can save you money through incurring less interest overall. The advantage of this type of loan is that you only have to make one repayment per month. The disadvantage is that you will usually be paying the loan off for a longer period of time. You should also be aware of any fees and charges applicable to the new loan, as often these are higher than what you may be currently paying.

What is a reverse mortgage?

A reverse mortgage allows people who own their own homes outright to borrow against the equity in their home. Unlike a normal mortgage you don't have to make repayments until you sell, move out of the home or die. The amount you owe must then be paid back from the sale of the house.

The downside of a reverse mortgage is that it can double in as little as 7 years due to compounding interest rates and fees. For example, at an interest rate of 8% per year a $50,000 loan could become $86,000 in 7 years or $108,000 in 10 years.
Talk to your accountant or solicitor before you apply for this kind of finance. Reverse mortgages can affect pensions. For information call Centrelink Financial Information Service on 13 23 00.

What if I get a loan with my spouse or partner?

It is common for a lender providing a loan to a person, to get that person’s spouse or partner to also sign the contract. If you open a loan account in joint names with your partner, it means you have become a co-borrower. Co-borrowers are both liable for the debt from the beginning. If the payments stop, the lender can choose who to sue for the whole debt. This may be decided by who has the highest income or can be found at the time. There is no legal requirement that you and your spouse or partner must both sign a loan contract as co-borrowers.

What happens if I provide security for a loan?

Sometimes lenders will ask for security before they approve the loan. It is a safety net for the lender in case the borrower does not repay the debt. If some type of property is offered as security, a car or a house, then a mortgage is taken over it and the lender will register its interest in the property.

Property that has been mortgaged stays with the borrower, but they do not have a clear title over it and cannot sell it without the lender’s consent.

What does it mean to ‘go guarantor’ on a loan?

Another type of security is a guarantee. You may be asked to ‘go guarantor’ for your partner, friend or a relative. The guarantor agrees to pay back the debt if the borrower can’t or won’t.

The guarantor can place a limit on the amount of money they want to repay under the guarantee. The limit can be either the amount already given to the borrower or an amount specified by the guarantor. In the event of default by the borrower, the guarantor need only pay the limited amount.

Before you sign as a guarantor, you must be given a copy of the contract and a document explaining your rights and obligations. The contract of guarantee must contain a warning notice set in a box on the same page that you sign, advising you to read the contract and information statement before you sign.

When a borrower falls behind with repayments, the lender should send a written notice (a default notice) to both the borrower and guarantor. If the borrower does nothing, the lender can take legal action against the borrower to have the debt repaid. Sometimes the borrower cannot repay the debt. When this happens, the lender can take legal action against the guarantor and the guarantor will have to repay the borrower’s debt.

Women are often asked to sign a loan document as a co-borrower or guarantor for their partner or a family member. They often do so, without realising what the ramifications could be and that they could be responsible for the debt.

Do I need to take out credit related insurance?

Lenders may ask you to take out Consumer Credit Insurance (CCI). They cannot force you to take out this insurance, it’s entirely your choice. Some CCI insurance policies will cover loan repayments if you are unable to make them because of illness, unemployment or death. However, there are usually

conditions when a claim will not be paid or limits to the number of repayments covered. You should read the policy carefully to know exactly what is or is not covered.

What does a finance or mortgage broker do?

A finance or mortgage broker often has access to a range of credit products and acts as an intermediary between you and a credit provider.

The broker must not start to negotiate credit for you until you have signed a finance broking contract that contains full details of the credit you want the broker to obtain. They must also not ask you for any commission before the credit is obtained and the credit matches the details in the finance broking contract.

How do I find out about my credit rating?

Veda Advantage Ltd is the largest credit reporting agency in Australia. To get a free copy of your individual credit file go to www.mycreditfile.com.au or write to Veda Advantage Ltd and give them:

• your full name
• your current residential address (if you have changed address in the last five years, you need to include your previous address)
• your date of birth
• your driver’s licence number.

What does bankruptcy mean?

Bankruptcy is one option some people consider when faced with a mountain of debt. Anyone can apply for voluntary bankruptcy. When you declare yourself bankrupt, a trustee will be appointed to sort out your financial affairs.

You will usually remain bankrupt for 3 years and then you are automatically discharged. However, the trustee can extend this period.

Declaring bankruptcy means:

• your bankruptcy will be made a public record.
• it will be listed with a credit reporting agency for 7 years
• your assets may be taken and sold by the trustee
• part of your income may need to be directed to your bankruptcy estate.

Assets that will not be taken include your clothes and necessary household furniture, tools of trade and your car to a specified value.

There are a number of debts not covered including court penalties or fines, maintenance and child support, social security overpayments, student loans, HECS and debts arising from fraud.

Electricity and other utility services are also not covered. You will need to pay these bills or make arrangement to pay the account in instalments to keep these services connected.

What can I do if I am experiencing problems or need credit advice?

If you are having difficulty paying your debts, contact the lender as soon as possible. You may be able to come to some arrangement that will help your situation. For example, repayments could be deferred or reduced, the contract varied or action taken to recover the debt postponed. If you cannot reach an agreement, you can get help from the:

• Financial Counsellors’ Association of NSW www.financialcounsellors.asn.au
• Credit and Debt Hotline on 1800 808 488
• Office of Fair Trading on 13 32 20.