The secret to healthy credit

Life is expensive – that’s no secret. We’re constantly forking out our hard earned dollars to pay for our busy lifestyles. A few hundred on rent here, $50 on fuel there and $150 on a lavish night out (yep, we all do it). Then you throw in your groceries, the middle of the week trip to the store for the things you forgot – always the toothpaste, isn’t it? – bills and all those little direct debits and you’ve got a constant flow of cash… going in the wrong direction. Some people are disciplined enough to budget for it but you’ll find it’s the majority of us who seem to be running around like chickens with our heads cut off trying to figure out how to make ends meet.

And that’s without any mishaps. It’s hard enough covering all of life’s expenses as they are. Then you bring inflation into the mix and suddenly covering those daily expenses – which is something you should generally be able to do out of your pay cheque – becomes a little more stressful.

Enter the creation of credit. The ability to spend money that isn’t yours. It’s convenient, dangerous and life-saving all at the same time. For anyone who’s been hit with an unexpected expense that throws their budget completely out of whack, loans and credit cards can act as a safety net when you start to lose your feet. If you’re in a car accident, need expensive medical care, your pet falls ill or is injured or you’re moving in a hurry and need help with the expenses, having a fall back is always reassuring.

However, it’s important to know which type of credit is best for your situation. Out of the hundreds of millions of people worldwide who rely on credit cards to pick up the slack, personal loans can sometimes be overlooked. As a small Australian alternative lender, we’re here to stick up for the little guy and let you in on the secret to staying clear of unnecessary debt.

We think that the biggest downfall to credit cards is the fact that your debt could be never ending. Yes, your credit card was helpful in sending you on that much needed trip to Bali but is that one holiday something you want to be paying off possibly forever? Ok, forever could be an exaggeration but, really, there is no end to a credit card. If you just keep paying the minimum every month and keep using your card for purchases, you may be old and grey by the time you see the end of that debt.

Loans, on the other hand, have a finish line. Whether it’s 6 months, 2 years or 10 years – there’s an end in sight. You know for sure that your loan repayments will come to an end, despite how much you’re paying off each month.

Let’s look at it this way: you could spend $2,000 on your $5,000 limit credit card with an interest rate of 15% per annum. Let’s say your minimum monthly repayment is $80 and you rarely put more than that on your card. That means that it would take you 2 years and 6 months to pay off that $2,000 and you would pay an extra $2,377 in interest.

Now, let’s say you were to take out a personal loan of $2,000 with an establishment fee of 20% and an interest rate of 4% monthly with a repayment period of 12 months (that is typically the maximum amount offered for $2,000). That means that after the 12 months your loan will be completely paid off and you will have paid an extra $1,360 in interest.

So, let’s look at your choices. In one hand you have your credit card, which will cost you $2,377 and take you 2 and a half years to pay off as long as you don’t ever use your card again. Then in the other hand you have a $2,000 personal loan which will take you 1 year to pay off and cost you $1,360. Which one do you choose?

One other aspect to consider is the fact that a personal loan is a one off payment to you that you are not able to draw any more money from throughout the term of your loan. You just use the loan to make whatever purchase or cover whatever bill and then you start repaying it. Some people will see this as a downfall considering they might need another helping hand down the track. But guess what? You can actually apply for another loan while you’re still paying off the first one. As long as you apply with the same lender, they’ll just add the repayments of your second loan onto your first one.

While loans are generally cheaper than credit cards in the sense that they have an end date, it’s important to make sure you pick the right lender when applying for your loan. So, if you’re new to the game of loans (cheap pun, sorry) then here a few tips on picking a good lender.

Firstly, you need to know what warning signs to look out for when it comes to dodgy lenders. These warnings signs include:

  • If the company contacts you without you first expressing any interest in their services. Legitimate credit providers will not contact you unless you have made the first move or you are a previous customer. Lenders only make offers to people who have submitted an application when them.
  • You’re asked to make upfront payments before you even get the loan. You might be told that this is to pay for things like insurance, tax or initial repayments. However, this is not standard practice for lenders.
  • You’re emailed from a generic email address like @gmail, @hotmail or an email that looks like it’s from a legitimate institution but spelled incorrectly.
  • You’re approved for a loan amount that is more than you require.
  • The company does not conduct a credit check.
  • You’re guaranteed approval.
  • The company offers you a surprisingly low interest rate.

When it comes to ensuring you are choosing a responsible lender, it’s important to know what responsible lending actually is. Responsible lending outlines that credit providers must not enter into a loan contract with a client or make them an offer if the contract is not suitable for the client. Lenders have a duty of care to their customers which means that they must not approve a loan application if the person is clearly unable to make their repayments.

You want a lender that’s going to put your needs before their potential to make a profit. A lender that will recognise the fact that you’re asking them to help your financial situation and not hinder it. Deep down, you know how much you can afford to repay and, despite the urgency of the loan, you should never trust a lender that is willing to give you more money than you can afford to repay. Your goal should be to find a lender that will take your bad credit and offer to help you fix it with bad credit loans. The good news is that, if you find the right lender, you’ll never need to swipe that dangerous credit card ever again.