Credit basics

Last updated: 18 January 2018

Credit Basics

What is credit?

In simplest terms, credit is borrowed money. When you pay with credit, your credit provider is lending you money to pay for goods and services. At a future date, you are required to pay back the amount spent plus any fees, charges and interest that you incur.


Types of credit

Credit comes in many different forms. Examples of credit products include credit cards, store cards, home loans, car loans, personal loans, overdrafts, leases, rent to buy, payday loans, post-paid phone contracts and utility accounts.

Your credit product should suit your needs, so it is important that you do your research and compare different products before entering into a contract and always read the product’s terms and conditions before you apply.


Why do we need credit?

Not everyone is fortunate enough to be able to pay for everything upfront or in cash. Sometimes, we need a little bit of help.

When used wisely, credit can help you pay for those big ticket items such as a house, a new car, a holiday, or even your education.

Credit can also be helpful in emergencies or when unexpected events occur that are out of your control.


The pitfalls of credit

The old adage is that nothing ever comes for free.

Lending money to anyone always comes with risk. That is why your lender will charge you interest and/or fees for providing you with credit, and may require you to offer up some sort of security in case you fail to make your repayments.

There is such a thing as too much credit and that’s when you borrow more than you can afford to pay back.

It’s easy to get caught up in the rush when you buy something, so it’s important to be realistic and honest about your financial situation. Ask yourself: can you actually afford to borrow this much money? What are the consequences if you fail to make your repayments?

Are you credit-ready?