How much do you know about credit?
According to Finder.com, there are currently more than 13 million credit cards in Australia with an average balance of around $3,000.
In a population of just over 26 million, chances are, you have at least one credit card – 68% of us do!
And with increasing numbers of retailers choosing to decline cash payments, life without credit can be extremely difficult.
But when we talk credit, it’s not just about cards. The word credit can be applied to more types of finance than ever before.
Through buy-now-pay-later (BNPL) schemes, pay-day loans, car finance and personal loans, credit comes in many forms. Used wisely, it is a very convenient way of transacting. Used unwisely, it can get you into all kinds of strife.
Given that most people regularly use borrowed money, how much do you really know about credit? Take our quiz to find out.
Q1: The interest free period on a credit card refers to:
- The month where you don’t pay interest on a purchase based on the date of the purchase
- The days when you don’t pay interest on a purchase based on the card’s billing cycle
- The days when you don’t pay interest on a purchase based on the date of the purchase
Q2: How much does a payday loan cost?
- Nothing, as long as it’s paid back on time
- Monthly fees and interest if the loan is not repaid on time
- Establishment fees and monthly fees. Government charges and default fees may also apply
Q3: Is there a benefit to checking your credit score before applying for a pay-day loan?
- Yes, if your score isn’t as bad as you think, you may have alternative loan options
- Yes, you’ll need to disclose it on the pay-day loan application form
- No, you have no reason to know your score
Q4: Buy-now-pay-later schemes are interest free – True or False
- True
- False
Q5: Do state governments provide interest free loan assistance?
- No, the government does not wish to operate as a finance company
- Yes, but only for first-home buyers approaching retirement
- Yes, but only for amounts up to $2,000
Q6: When applying for a loan, lenders will review how many credit cards you have.
- True
- False
Q7: It is possible to negotiate a credit card with 0% interest rate – True or False?
- True, under certain circumstances
- False, credit cards always charge interest – that’s their nature
Q8: Which of the following are forms of unsecured loans?
- Home mortgages
- Personal loans
- Debit cards
ANSWERS & CALL TO ACTION
Q1: The interest free period on a credit card refers to:
- The months where you don’t pay interest on a purchase based on the date of the purchase
- The days when you don’t pay interest on a purchase based on the card’s billing cycle
- The days when you don’t pay interest on a purchase based on the date of the purchase
The interest free period on a credit card refers to the days where interest is not calculated on your purchase. The interest free period generally commences on the first day of your billing cycle. To maximise your interest free period, check the billing date on your card statement, then try to time large purchases accordingly.
Q2: How much does a payday loan cost?
- Nothing, as long as it’s paid back on time
- Monthly fees and interest if the loan is not repaid on time
- Establishment fees and monthly fees. Government charges and default fees may also apply
Pay-day loans are one of the most expensive forms of credit available. Borrowers will pay establishment fees and monthly fees, as well as interest on longer term loans.
Pay-day loans may also attract government charges and hefty default fees so it’s important to read the fine print thoroughly before signing up.
The reason these loans are so expensive is because they are easy to obtain and are generally used by borrowers with a poor credit history. The high cost to the consumer is the lender’s way of clawing back some of its losses in the event of a default.
Q3: Is there a benefit to checking your credit score before applying for a pay-day loan?
- Yes, if your score isn’t as bad as you think, you may have alternative loan options
- Yes, you’ll need to disclose it on the pay-day loan application form
- No, you have no reason to know your score
As pay-day loans are very expensive, it’s a good idea to check your credit score before you make an application, because if your score isn’t as bad as you think, other less expensive forms of credit may be available to you.
Q4: Buy-now-pay-later schemes are interest free – True or False
- True
- False
If you responded ‘True’ you’re technically correct, however there’s a catch. While the Buy-now-pay-later (BNPL) scheme itself doesn’t charge interest, repayments are automatically deducted from your nominated bank account or credit card.
If you default on a payment, e.g., there wasn’t enough money in your account to cover it, the BNPL may charge you a late payment fee. Additionally, the account may charge you an overdrawn fee.
If your BNPL deducts payment from your credit card, the amount will be added to your card balance and will attract interest if you don’t repay the full card amount every month.
Q5: Do state governments provide interest free loan assistance?
- No, the government does not wish to operate as a finance company
- Yes, but only for first-home buyers approaching retirement
- Yes, but only for amounts up to $2,000
The No Interest Loan Scheme (NILS) was set up to provide small, interest free loans to individuals and families experiencing financial difficulty. Supported by state governments, NILS are a form of community lending, funded by the banking sector, and accessed via recognised charities such as The Salvation Army and The Good Shepherd.
Amounts of up to $2,000 are available to people who:
- have a Health Care Card, a Pensioner Concession Card or an income less than $45,000,
- have lived at their current address for more than three months,
- can show that they can repay the loan.
The benefits of NILS loans is that they are quick and easy to apply for and there are no fees, charges or interest; you only repay what you borrow.
On the downside, a NILS loan can only be used for essential goods or services. They are not cash advances; the lender will usually make a payment directly to the supplier of the goods or services, or provide a cheque made out to them.
Q6: When applying for a loan, lenders will review how many credit cards you have.
- True
- False
If you responded ‘True’ to this question, you can be forgiven, but the correct response is ‘False’.
When applying for any kind of loan, to ensure you can support the repayments lenders will assess the combined credit limits of all your cards. For example, if you have a card with a credit limit of $5,000 and another of $10,000, lenders will assume you owe $15,000 on your credit cards – regardless of the actual balance.
This is because you could potentially max out your cards and end up with a debt of $15,000.
If you’re planning to apply for a loan and you have cards you don’t want included when your application is assessed, it’s a good idea to cancel them first.
Q7: It is possible to negotiate a credit card with a 0% interest rate – True or False?
- True, under certain circumstances
- False, credit cards always charge interest – that’s their nature
It’s true: you can get a credit card with 0% interest for consolidating the balance of multiple cards onto one new card. Referred to as a balance transfer, the new card will accrue no interest for an introductory period, giving you time to pay off the debt.
This is a great way to clear your credit cards as quickly as possible, but the interest free honeymoon period will be for a limited time. Depending on the card, this can be anywhere from 55 days to three years. After this period, interest will be charged on any outstanding balance.
It’s important to note, however, that some cards will apply interest to any new purchases while the original balance remains interest free during the introductory period – make sure you understand the Ts & Cs before signing up to anything.
Q8: Which of the following are forms of unsecured loans?
- Home mortgages
- Personal loans
- Debit cards
Any form of finance that requires collateral is considered a secured loan. For example, when applying for a home loan, the lender holds the title deed of the home itself until the loan is repaid. This is, in fact, what is meant by a mortgage.
When you use a debit card, you’re using your own money so given that these are not forms of credit, they are not unsecured loans.
Personal loans are considered unsecured loans because there is no security over the amount borrowed. Credit cards and pay-day loans fall under this category too, which is why these forms of credit attract higher interest rates than secured loans.
When it comes to borrowing to buy a car, the car itself may, or may not, be used as collateral depending on the terms of the loan. If the car is used as security on the loan, and the repayments are not made, the car may be repossessed. If the lender does not require security, they will cover the risk of default by charging a higher rate of interest and various fees and charges.
When unsecured loans are not repaid, lenders will take steps to recover lost money and interest, including engaging debt collection agencies and legal action.
So, how did you go?
Credit may seem like a modern convenience, but historical records show that it was actually used in Ancient Mesopotamia for property and agricultural purchases, almost 5,000 years ago!
Over the millennia, credit remained fairly unchanged until the advent of credit cards. Here in Australia, we were first introduced to credit cards in 1974; remember the Bankcard?
Since then, of course, credit facilities have evolved to become more flexible and accessible than ever. Further, many day-to-day household and business transactions wouldn’t be possible without it!
So while we have embraced credit for all it conveniences, we must track our credit spending and stay in control.
If you find yourself in credit difficulty, there are several avenues of assistance open to you.
- Speak to your lender if you’re not coping with your mortgage: they really will want to help you.
- Contact utilities companies if you’re having difficulty paying your bills: they have payment plans to help.
- Credit card providers offer repayment options.
- Many government payments can be made in instalments such as car registrations. Call the relevant office to discuss.
- For emotional assistance, contact Beyond Blue on 1300 22 46 36.
- Speak to your financial planner to set up an ongoing budget and debt reduction plan.
For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.
