CREDIT

Understanding credit helps you to make better decisions about the type of credit you might use and helps you stay out of financial trouble. When your income situation changes, it’s easy to start using more credit and sometimes financial habits change as a result. This page explores how to keep across your credit and understand your financial situation.

What is Credit?

Credit means that you are using someone else’s money. Credit commonly refers to a contractual agreement (credit agreement) between a borrower and lending party. The borrower receives a sum of money or something else of value e.g., house, car, and commits to repaying the lender at a later date. It always costs to use someone else’s money, typically with interest and according to the terms and conditions of the credit agreement.

Types of Credit

Secured Credit

Secured credit requires the borrower to provide an asset to be secured to the money being lent. Types of secured credit loans are mortgages, car loans where the home, land or car are the property secured to the credit. This type of credit is often for higher loan amounts and receives lower interest rates as there is security to the lender. There is a risk associated with this type of credit as your asset that was used as collateral becomes at risk if you default on repayments and do not meet your contractual obligations.

Buying a car

Car yard finance is secured to the car you purchase from that car yard, but if you borrow money from the bank to buy a car, it’s generally not secured in the same way. Visit our buying a car page for more information.

Buying a home

Buying a property is likely one of the biggest purchases you will make in your life. Review our buying a home guide to understand your options as a Defence member before choosing a loan provider.

Unsecured Credit

Unsecured credit does not require an asset as security to obtain the money. This type of credit is more expensive to the borrower as this loan type usually has higher interest rates compared to a secured loan, there is a risk to the lender of not getting their money back. The interest is often compounding interest (interest on interest) and it can take you as much as 10 years to pay off a credit card with an initial balance of $1000 if you are only paying the minimum payment.

Types of Unsecured Credit

Credit cards

Credit cards are a form of unsecured credit which comes in the form of a plastic card that gives you access to money the bank has agreed to lend you for a certain period of time. You can work out how much a credit card will cost by using this comparison tool.

Store cards are used like regular credit cards but are usually offered by larger retailers (e.g.,Myers and others) and often charge much higher interest rates in spite of what seems like store incentives to use them.

Buy-now-pay-later

Buy-now-pay-later service (also known as BNPL) offers you a way to buy a product and delay payment but still take the product home. You would generally plan to pay off your purchase over a few weeks or longer for bigger purchases. No interest is applied, but if the payments are not made on time, late fees occur.

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Personal loans

You can use a personal loan to pay for something special, like a holiday, car or home renovations. It costs money in interest and fees. You have to repay it with interest over a fixed term, usually between one and seven years. Doing your homework to get the best deal on a personal loan can save you thousands of dollars.

Short-terms loans

A short-term loan lets you borrow smaller amounts of money from $200 to up to around $5,000, $10,000 or more. Some short-term loans are now advertised up to $50,000. Establishment fees depend on how much you borrow and when you project you will pay it back.

A payday loan is a short-term loan usually less in amount (from payday to payday) up to $2,000, which you have up to 16 days to repay (a fortnightly pay cycle) before additional costs are charged.

Example from lender: a person borrowing up to $5,000 as a short-term loan might pay a comparison rate of approximately 65.7% and if borrowing $10,000 the comparison rate might be around 47% or more, which amounts to around $7,500 interest per year over a 2 year period. That’s expensive!

Example from Moneysmart: A quick fix costs a lot: “While it might look like a quick fix, a payday loan has a lot of fees. For example, to pay back a $2,000 payday loan over one year, your total repayments will be about $3,360. That's $1,360 more than you borrowed.”

Dos and Dont’s of Credit

Before you apply for credit:

1. Ask yourself some key questions 

  • Is this credit for something I need or something I want?
  • Are there other ways to pay?
  • How much extra will this cost?
  • Where is the best place to get the credit I need? 

2. Do 

  • Your budget to check if you can afford the credit. Use the budget calculator to get an accurate result.
  • Find out what the credit will cost.
    • Your credit agreement should show any fees and charges and interest rates for the product.
    • Look for the comparison rate of the product (this includes fees, charges and interest)
    • Work out how much the credit will cost you in addition to the product for which you are obtaining the credit. 
  • Check that the lender is licensed to provide credit.
    • Look for their AFSL or CL on the Credit agreement
    • Find out more about ASIC’s regulation of the conduct of creditors
  • Read the credit agreement and find out
    • When payments are due
    • Whether there are penalties for paying credit our early
    • About hardship provisions in the agreement 
  • Get legal advice about the agreement if you don’t understand anything that’s in it. 

3. Don’t 

  • Sign a credit agreement without knowing and understanding the terms and conditions
  • Apply for lots of credit when you don’t actually need it - it affects your credit rating/ score
  • Apply for credit for someone else- it goes on your credit report and means you are liable for the debt
  • Don’t go guarantor for a loan for someone else unless you are prepared to pay the entire loan in the case of a default. 
It’s pretty much guaranteed to affect your own financial fitness!
  • Apply for credit (including phones etc.) without considering whether you really need the product- every application goes onto your credit report

Rights and responsibilities of using Credit

Your rights and responsibilities 
as a borrower

A person who borrows money from a creditor is known as a debtor. A debtor must: 

  • Provide accurate information when making credit applications (this identifies your capacity to pay)
  • Work out whether you can afford to repay the credit by doing a budget 
  • Understanding the credit product by reading the credit agreement including all the terms and conditions
  • Make payments when they are due
  • Communicate any changes to the creditor

Rights and responsibilities 
of the creditor

The creditor is the person or organisation who provides the credit. A creditor must:

  • Provide all information about the credit and the terms and conditions that apply to it
  • This information must be provided in writing - 
a credit agreement
  • Test your capacity to pay 

The creditor can:

  • Check your credit report to work out their risk of providing the credit 
  • Negotiate the costs and terms and conditions of the credit 
  • Pursue the debtor for unpaid credit
  • List a debt on your credit report
  • Enforce unpaid credit under certain conditions

Credit Reporting and Credit Scores

Credit Report

A credit report shows all applications for credit, late bill payments and related information. Creditors pay to access credit reports and use this information to decide whether you are a good risk for them when you apply for credit. Credit reports can now record late payments of ordinary bills like electricity and gas etc.

Credit Score

A credit score is a score or rating given by some credit agencies and is often used by lenders to decide what sort of risk you pose to the lender if they lend you money.

Things that affect your credit report and credit score

Your credit rating/score is affected by things like: 

  • Any credit application (including credit cards)
  • Multiple credit applications [including phone contracts] 
  • Regular late and / or non-payment of bills including utilities, phone bills, loans etc. 
  • Mortgage default

The best way to maintain a good credit score is to:

  • Only apply for credit for things that you absolutely need [e.g. house, car] 
  • Make sure you always pay your bills on time 
  • Do an annual check to ensure that nobody else is using your identify to gain credit
  • Avoid high cost credit [e.g. using unsecured credit such as credit cards] which may result in late payments due to unaffordability

Frequently Asked Questions

1What does applying for credit mean?
The Law Handbook defines credit as a ‘debt that does not have to be paid until some future time. Being allowed to pay later, in the future, for something you are getting now’. This could include using money or a service now and being able to pay for it later. Examples are buying a phone on a plan, having utilities connected and taking out a secured (e.g. car loan, home loan) or unsecured loan (e.g. credit cards, Buy Now Pay Later products).
2Does getting a credit card help me build a good credit rating?
No, this is an urban myth, getting a credit card means you enter into an agreement with a lender for unsecured credit which is relatively expensive and seen as a risk because you have access to the full limit on the card at any time; whether you are in a position to make the necessary payments or not. There are many other ways to improve your credit score which do not involve you applying for more credit. These include simply paying your bills and existing loans on time.
3I thought that if I applied for financial hardship from a creditor, it would not affect my credit score?
Since July 2022, financial hardship is noted on your credit report but creditors (lenders) are not allowed to use this information to discriminate against you when you apply for credit.
1What is a credit score?
Some credit reporting agencies give you a credit score based on the information they have on your use of credit, repayment history and so on. A credit score is a number, usually between 0 and 1000 [sometimes 1200]. Not all credit reporting agencies give you a credit score, but may instead give you a credit rating such as ‘low’, ‘fair’, ‘good’, ‘very good’ or ‘excellent’.
2What is a credit report?
A credit report is published by a credit reporting agency and is designed to show how ‘credit worthy’ a person is. Creditors pay to access credit reports and use the information to decide whether you are a good risk for them when you apply for credit. That is whether they should lend to you and if they do what interest rate they may need to charge you to take account of the risk you apparently pose. Credit reports usually provide an overall ‘credit score’ and show things like any applications you have made for credit, late or missed loan repayments and bill payments.
3What are credit reporting agencies?
Credit reporting agencies compile information about debtors (anyone that borrows money or uses credit) and sell that information to creditors in the form of credit reports. You can read more about credit reporting agencies on the Moneysmart website.

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