Becoming financially independent and secure – budgeting, saving, debt and other key matters.

4b. Credit

Est. read time: 3 min

Cash vs Credit


When you don't have enough money to pay all your expense, one thing you can also do is use credit. A simple way of understanding cash vs credit is thinking of cash as the money you have, and credit as the money you borrow.

While having access to extra money through getting credit (credit card or loan) can be very tempting, remember – because it isn't your money it may end up costing you more than saving the necessary amount and paying in cash.

Credit Cards


Credit cards are not free money. All credit cards will charge you interest if you don't pay the balance off in full, and some will charge you a fee every year just for having the card. Credit cards are a very expensive type of debt – typically the rates of interest charged are very high.

A credit card statement will show you two options when you receive it: pay the balance in full or pay the minimum (usually a % of the balance), and this is where people get into trouble. If you only pay the minimum, not only will you accrue interest on the remainder (compound interest), but it will take you much longer to pay it off.

Compound Interest


Compound Interest is interest that accrues on your debt plus any interest you already owe – in other words you will be getting charged interest on interest. For example let's say you owe $5,000 and your credit card is charging you 22% per annum:

  • In the first month, you will incur an interest charge of $91.67. That means by the end of that first month you will owe the credit card company $5,091.67;
  • If you make no repayments, next month your interest will be charged on the new amount owing of $5,091.67 and will be $93.35 which means at the end of month 2, you will owe $5,185.01;
  • This will continue so that by the end of 12 months, you will owe $6,217.98 and after 5 years, your initial debt of $5,000 will have grown to $14,871.94

Payday Lending


Try to avoid what is known as ‘payday lending'. These are “quick, easy” loans that will have the money to you “in just hours”. They are advertised as a great way to get money when unexpected expenses crop up. In reality these loans charge extremely high interest rates and can cost more than you expect. Borrowing just $500 for a month may cost you $120 in fees and charges!

Further advice on payday loans can be found on the Consumer Credit Legal Service webpage.

Buy Now, Pay Later


Advertised as interest-free finance or ‘buy now, pay later’ arrangements, providers such as Afterpay, Zippay, Humm, and LatitudePay allow you to purchase now and pay later through equal instalments every 2 weeks or monthly, depending on the provider, and the payments are automatically deducted from your chosen card or bank account.  Whist this might seem attractive to help you out of a tight spot, be aware of the fees that these providers charge for late or missed payments, and some also charge processing fees and/or monthly account fees.  For example, in the case of Afterpay:

  • If a payment is unable to be processed on or before the due date, late fees will apply – an initial $10 late fee and a further $7 if the payment remains unpaid for 7 days after the due date;
  • For each order below $40, a maximum of one $10 late fee may be applied per order.  For each order of $40 or above, the total of the late fees that may be applied are capped at 25% of the original order value or $68, whichever is less.

Whilst these providers do not charge interest, if you use a credit card as your payment method then any unpaid amounts on your credit card will attract interest.

Alternatives to Expensive Debt


If you need money in a hurry you should try the following options first:

  1. Negotiate with your provider: many providers offer payment plans or other help for people in financial hardship;
  2. Consider a No Interest Loan or a StepUP loan;
  3. Grants are available to assist with living costs.

More information can be found at 3f. Financial assistance for living costs.

More information on managing your debts can be found at 4e. What to do when your debts are out of control and the MoneySmart website.

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