COH-be-clever

Credit can be complicated, but armed with a few smarts you can avoid the traps and learn how to make credit work for you.

Credit. It can either be a ticket to financial flexibility, or something you become a slave to; it all depends on how you use it.

Regardless of whether it’s credit cards, store cards, personal loans or home loans, all forms of credit have their pitfalls and traps.

But you can avoid these by taking a few simple steps such as:

  • Budgeting: understanding how much you can spend and ensuring your loan amounts or credit limits match what you can afford to pay back should help you avoid a credit blow-out.
  • Understanding interest: all types of credit involves you being charged interest on the money you borrow. Understanding how interest works will put you on the front foot.
  • Shopping around: comparison sites such as RateCity or InfoChoice help you compare the different product features, interest rates and fees of a range of credit products, such as credit cards and personal loans. A little research will ensure you find the product that’s right for you.
  • Using the right product for the right situation: the more you understand about the features of different credit products, the less chance you have of using your credit card for the wrong types of purchases.
  • Making repayments via direct debit: making your credit repayments by direct debit puts them on set-and-forget mode. By doing this you’ll never miss a payment and do unnecessary damage to your credit history.
  • Paying off the balance in full each month: this applies to credit cards and store cards. By only making the minimum repayment you end up paying interest on interest and this can lead to you accumulating a much bigger debt than the value of your original purchases.
  • Making additional repayments: when you’ve got surplus funds, pay off your debts. Any additional repayments you make will minimise the interest you are charged and ultimately, reduce the size of your debt. 

Why it’s important to get credit right

It’s important to get credit right at an early age as it can have a major impact on your ability to borrow money when the time comes to pursue a really big goal, such as buying your first home. 

Any time you enter into a credit contract – from a mobile phone contract to a personal loan – your ability to fulfil your obligations under the contract is monitored. 

Late payments or defaults are recorded in your credit history and remain there for five years. These black marks could affect your ability to secure credit in the future or result in you being charged higher interest rates.

If you’d like to know more, credit history files are kept by credit reporting agencies, and you are able to request a copy of your file free of charge once a year. 

What to do if you get into trouble

If you run into debt trouble, there are steps you can take to fix the situation. 

If credit card debt is the primary problem, you could look to take advantage of a 0% credit card deal. These allow you to transfer the balance of your existing credit card – or cards – to a new card and not pay any interest for a specified period of time, which can give you some breathing room.

But you need to be disciplined and pay off the outstanding balance before the interest-free period ends, as once the interest kicks in it is usually at a higher-than-average interest rate. 

If your debt woes extend across a range of credit products, a debt consolidation loan may be the answer. These loans allow you to refinance your debts, bringing them together under one interest rate with one regular repayment.

Your financial adviser can help with more information about debt consolidation. If you don’t have a financial adviser, click here to find one.