WHAT KIND OF CREDIT CAN YOU DO WITHOUT?

With the end of the year fast approaching, many people find themselves in a financially stressful situation. It seems the extravagance of Christmas is growing each year, and your finances can take a hit if you are not careful. To help you navigate the financial pitfalls of the festive season, I want to discuss the different types of credit available.

For a lot of families, December is the most expensive month of the year. If you don’t have enough cash available to cover your purchases, you will most likely use some form of credit, which becomes a debt you have to repay. The longer it takes you to repay a debt, generally the more interest you will pay. Basic credit 101, right?

What you may not already know is that the Australian Government employs the Australian Securities and Exchange Commission (ASIC) to help protect you and other consumers and investors by enforcing our financial laws. They are also the experts in credit and have grouped credit in the following broad categories. I’ve broken them down so it’s easy to understand and offered my insights into what kind of credit you should avoid.

HOME LOANS: Are secured against a property and rates can be as low as 3-4%. Usually a longer-term loan of 20 or more years. If you have to resort to credit, this is your best option as the rates are as low as you will get them. Limbo low.
PERSONAL LOANS: Often are secured against property, like your new car. Rates can be from about 6% and up. The rate will depend on what the personal loan is for and usually have a term of 5 or fewer years. Securing a personal loan can be messy, as the bank will have to rubber-stamp your reasoning. A solid option if the need arises.
CREDIT CARDS: Are unsecured loans, with rates starting around 12% and can reach up to 20%. Credit cards are the most common form of credit because they are so easy to get. The trick is paying it back in time to avoid the harsh interest rates. If you are not religious in repaying your credit, steer clear of the credit card trap unless it is absolutely necessary.
STORE CARDS: Are loans to purchase goods from the retailer’s store, with rates comparable to that of credit cards. Stores love you using their cards and for good reason, if you don’t make their repayments you may end up paying way more for your goods than you originally anticipated. Great news for the store, not so much for you. Store cards are just as bad as the typical credit card and are to be avoided if you can help it.
INTEREST-FREE DEALS: Allow you to buy a product from a store without having to fully pay for it. You get an interest free period, typically 12-24 months, to pay off the loan before any interest is charged. Once the interest-free period ends, your rates will just about reach the stratosphere. These types of deals can generally be OK, provided ‘future you’ can be trusted to pay the purchase off within the agreed time frame. If not, you are in for some financial pain.
PAYDAY LOANS: Are unsecured loans with terms ranging from 16 days to 1 year, with unbelievably high-interest rates. Avoid payday loans like the plague – if you can help it, as they prey on the desperation of consumers and their need for quick cash. Of course, if the repayments are not made, you will be hit with heavy penalties.

So, did you spot the trend?

Although it is easier said than done, avoid credit where you can. If you have to take up credit, just be responsible, play by rules and you won’t get stung. You might also consult a finance broker to investigate the best options for you. It could save you thousands in interest.

So, that is it from me for 2017. Be safe (and financially responsible) this holiday season and I’ll look forward to catching up with you for an even better 2018.

- Michael De George