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Responsible Use of Credit

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Credit is designed to improve our financial wellbeing. When used responsibly, credit can offer us the ability to purchase now, the things that we need and want, where can is not always available.

As long as you understand the cost (interest and finance charges) of having the convenience of credit - as well as the ability to repay the debt in the future - then credit can be a very useful concept. 

There are many different types of credit available today. Depending on your needs, and the way you intend to pay off debt, you should determine the most suitable type of credit. 

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Budgeting for Money Management

Budgeting plays a key role in good money management. Even careful spenders can find themselves sliding into debt. Often though, people find themselves in financial trouble simply because they spend more than they earn.

The best way to prevent credit problems, is to develop good money habits from the start. Budgeting encourages us to do just that. It is the only way you will know both where your money goes each pay period, and where you can cut back if you are overspending.

Track your spending

To make sure your budget shows an accurate picture, rather than a ‘best case’ scenario, you will need to allow for all of your household income and expenses. To make sure you have covered everything, review your bank statements, credit card statements and cheque butts for the most recent 12 month period—that way, you’ll also factor in the one-off payments you make during the year – eg. car registration. Once you have all the information on what you earn and what you spend, divide it into two categories – income and expenses. These will form the basis of your budget.

What you earn

This is the money (net income) that is deposited into your bank account on a regular basis, weekly or monthly.

What you spend

The money you spend can be divided into certain categories, for example, those that relate to your home, your car, your health and so on. Divide your spending into these categories and add the total for each category. Then add up your total expenses—if there is any money left over, put it into a savings account, or pay more back onto any outstanding loan accounts. 

Tips to sticking to a budget

  • Keep track of your spending on a regular basis.

  • Set up direct debit accounts and payroll splits to maintain regular payment of everyday bills and savings

  • Put some money away on a regular basis to cover large or infrequent expenses, so that the bills don’t come as such a shock.

  • Use our budget calculator 

How much can you afford

Before you apply for credit, it is important to know how much you can comfortably afford to repay. Although the credit company or lender will qualify you based on your ability to repay, it is your responsibility to be comfortable with the repayments and not overextend yourself.

To figure out your comfortable repayment plan, you will need to take a hard look at your income and your expenses – both now and in the future. An easy and accurate way to look at these figures is to prepare a budget.

Lenders and creditors are looking for three things when qualifying for credit: capacity, collateral and credit.

  • Capacity: Can you afford to repay the loan?

  • Collateral: Do you own more than you owe? Can you provide security?

  • Credit: Are you a good financial risk? Your history of repayment on other loans, and your history of stable employment and residence will also be used to determine credit worthiness.

How we can help you

For more information about spending wisely, or to get help in setting up a budget, please contact us during business hours. You may also be interested in the following tips and information:

  Types of Credit

Credit cards

Let you borrow money from the card issuer on an ongoing basis up to a pre-determined credit limit. You can repay the whole or part of the money outstanding each month, but interest is charged on the whole outstanding balance. Unpaid balances are carried over to the following month, together with an interest charge.

Store cards

These are generally more expensive than traditional credit cards, as they are issued by a company or retailer. The terms and conditions of issue may also vary among stores.

Personal loans

This type of loan is usually used to purchase one-off items like a car, caravan, holiday or computer. You can also use a personal loan to consolidate debt from credit cards or finance companies. Personal loans are for a fixed amount of money with a consistent repayment amount, therefore, they are great for budgeting. Plus, they are generally short term loans of 2-7 years.

‘Interest-free’ and ‘no repayment’ financing

This type of loan is usually offered by retailers through a finance company. Most often, you’ll see this type of financing used for furniture or computers with a low interest rate or interest free period. Be warned though—if the balance is not paid off prior to the end of the interest free period, high interest charges usually apply.

Line of credit loans

This type of credit allows you to draw on an available balance to a pre-determined limit. It is usually attached to a loan, and is used for larger purchases (Eg. home renovations, holidays, education etc.). Funds are access by cheque or ATM card, and interest is only payable on the funds drawn down, not the limit of the Line of Credit. Although it is used for similar reasons to a personal loan , it is favourable to a personal loan, as you can use the funds over and over as you repay it—it is not for a fixed term of time, and the interest rates are usually lower than a personal loan or credit card.

Overdraft

This type of credit is usually a pre-set limit attached to your bank account. It basically lets your bank account go under the NIL balance for monthly transactions. Interest is charged at the end of the month on funds used under NIL balance. Access to funds generally includes ATM, Cheque, or counter service.

Mortgages

Mortgage loans have usually the lowest interest rate of all types of credit. That is because they involve a larger sum of money financed over a longer term of repayment, and because security is taken over a home property.  They are generally used to finance property, but can have personal loans or lines of credit added if necessary.

Good debt vs Bad debt

Surprisingly, all debt is not bad. For example, if debt will allow an item to appreciate in value or achieve some of life’s goals, like having a home, car or shares, then it can be considered “good” debt. Good debt is usually what you need to qualify for, like a loan from a bank. Bad debt is generally the type of debt that adds up quickly by impulsive purchases of consumable items (dinners out, theatre tickets, clothing). Credit cards are usually known as an example of bad debt, as you can usually spend more than you earn. Good debt or bad debt, it still will need to be repaid, so budget accordingly.

Secured or Unsecured debt

Secured debt is generally used for large purchases, where the bank holds the rights to the asset until which time the debt is repaid in full eg. a property mortgage or car. Because the debt is secured, the interest rates are generally lower than on an unsecured debt. An unsecured loan is one that is not guaranteed by an asset or security, and is therefore charged at a higher rate of interest (Eg. credit card or small personal loan).

  10 Tips for Managing Debt
  • Choose the best type of credit to suit your needs

  • Never treat credit like cash

  • Shop around—don’t just look at interest rates, consider fees and charges too

  • Don’t take on more debt than you are comfortable to repay over time

  • Set a spending limit with your credit or loans

  • Don’t build up debt now, on the promise of income you expect to earn later

  • Every dollar you pay in interest is money out of your pocket. Reduce the interest you pay, by repaying more than the minimum required payment

  • Paying off debt should be a priority. Set up a direct debit that allows for more regular repayments to pay off the debt sooner

  • Don’t take on a higher credit limit without understanding your ability to repay the higher debt

  • Pay with cash or Visa Debit card whenever you can—that way you only spend the money that you have saved.

  Financial Trouble

Possible warning signs of financial trouble

  • Regularly spending beyond your budget for the week or month

  • Living from pay packet to pay packet.

  • Being unable to meet large one-off expenses like household insurance.

  • Paying only the minimum repayments on your credit card each month.

  • Not knowing the amount of your total debt

  • Being near, or at, your credit card limit – especially if you have more than one card.

  • Consistently paying bills late.

  • Hiding your indebtedness from your spouse or partner.

Getting your finances under control is not always easy. And it can take time. Most people get into debt simply because they spend more than they earn. It may be possible to increase your income, but it’s usually easier to cut back your spending.

Ways to cut your expenses

  • If you do need to use your credit card for large purchases, then do not use it again until you have completely paid off the balance of the card from the previous purchase.

  • Set up a direct debit to pay down or off the balance on a monthly basis to avoid interest charges

  • Visit the shops less frequently. The more often we shop, the more we are likely to purchase ‘impulse’ buys.

  • Aim to pay in cash. 

  • Avoid borrowing from one credit provider to pay another—this can lead to over-indebtedness

Tips to get you back on track with your finances:

Pay more than the minimum

By paying more than the minimum repayments you will lower the principal and thereby reduce the interest charge.

Prioritise your debts

List all your debts, ranking them according to the rate of interest . Concentrate on paying off the higher interest debts first. Once the highest-rate debt is paid off, add the total you were paying on this debt, to the next one on your list. 

Talk to your lenders

Some members make the mistake of avoiding making payments all together as they fear contacting us. There is no need to be embarrassed; we are more than willing to try to help in these circumstances.

It is much better that you call before your credit history is affected. In circumstances such as these, we can possibly revise your repayments and/or extend the time you have to pay.

Consolidate your debts

Debt consolidation involves combining all your debts into one loan. This can have many advantages including reducing your minimum monthly repayment; establishing a payment structure that will see the loan paid off in a structured way, setting a fixed monthly payment that helps with budgeting. Note though, that this strategy only works if you change the spending habits that got you into debt in the first place.

 

 

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