Bank Better, Live Better
Make credit a tool, not a trap
Credit can be a great tool to help you achieve goals, but it can also become a trap that makes this much harder.
Most people will use credit at some stage in their life, so it’s essential to understand how it works, and make smart decisions about when to use it.
Put simply, credit is the amount a credit provider is willing to lend you. When you use that credit, you create debt. So for example, if you have a store card, credit is the total amount you’re able to spend on the card. Each time you use it to make a purchase, you create debt.
When you use credit, you're spending money that you haven’t even earned yet. This means that for months or years to come, a portion of your salary already belongs to someone else. If you’re using credit for daily expenses, or to buy things that don’t add long-term value to your life, you'll always be paying for past decisions, instead of using your money to build your future.
But credit can be valuable when it's used to help you reach your goals – like buying a home or reliable car, getting equipment that could help you earn more, or starting or growing a business.
How much is credit actually costing you?
When you decide to use credit, you need to understand how much it will cost you, and then plan for the full monthly expense in your budget. Just as you would for a big purchase, you should compare your options and find the best offer available.
The total cost of credit is the amount you borrow, plus all of the interest and fees you’ll pay.
This is the money you pay in return for using credit. It is charged as a percentage of the amount that you owe. Every month, part of your credit repayment is used to pay this interest – so the more you pay off your loan, the less interest you pay every month.
A portion of your monthly payment also covers fees. These fees could include an initiation fee, monthly service fees, and credit life insurance fees. Before you take up credit, make sure you understand the total cost of credit and use this to compare offers.
You will keep paying interest and fees for as long as it takes to repay your debt. If you miss any payments, added interest could even start increasing the amount that you owe. Remember that the longer you take to repay debt, the more it will cost you. But this also means that with most debt – the sooner you repay it, the less it will cost you.
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saving for short-term goals
Whenever you can, get into the habit of saving up before you make purchases – whether it’s a TV or a holiday – rather than buying on credit.