Credit cards - the basics

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Why not cash?

There is no question that the cheapest way to buy an asset is to pay for it in cash. This is because the purchase is interest free, in other words, you do not have to pay for the right to use someone else's money. This includes not only the interest component, but also any charges and fees that apply to the initial loan and its ongoing maintenance.

Regulation of credit contracts

Credit contracts can be regulated by either:

• legislation;
• the common law of contract;
• the terms of the contract itself.

What is credit?

There is no easy definition for "credit".

In general, credit describes a situation where you have to repay the amount borrowed, usually in instalments. It is important to remember that credit is essentially a contract which establishes a duty to repay a debt under specified conditions.

Supplier credit

The company that supplies the goods that you are buying on credit often arranges finance. This is a potential conflict of interest that could work against you. It is possible that the supplier is more interested in making a sale than the problems you may face later in the day when there are difficulties making repayments.

Check any documents that you are asked to sign. When you sign an application for credit it is as though you completed it, no matter who filled in the form. There are also criminal penalties that may apply where there are false declarations - be careful!

What's in the contract?

Just because you are offered a credit contract, it does not mean you have to sign it immediately! It is often a good idea to take it away to study it, and if you do not understand what is written, get some advice.

In most States there will be Government departments and non-government agencies that can help. Again, it is much better to check what you sign before you get into trouble.

Guarantors

A guarantor is a person who agrees (in an enforceable contract) to repay the amount of the loan (often all that is owed under the contract) if the borrower defaults on the loan. There can be other charges as well.

A person asked to go guarantor should think very carefully before making the commitment:

• ask yourself why the lender wants a guarantor in the first place - is it because the lender is concerned at the ability of the borrower to repay the loan? This may not be a good sign, so the proposed guarantor should always make these checks themselves;
• take a long look at the credit contract - especially the length of time the contract will run, the total amount that must be paid (this may be what the guarantor has to repay if the borrower defaults) and the terms of the guarantee;
• find out what the actual risks are - it may be well worth the time and effort to get professional advice.

How much?

There are no hard and fast rules about the amount of credit or its cost - this varies amongst credit providers. Assess whether you can afford the credit at the time that the contract is signed, not later. Be especially careful when the contract is supplier credit.

Insurance

You can take out credit insurance. This will provide protection if you (for instance) fall ill or become unemployed. The credit provider can only compel a borrower to take out insurance in limited circumstances.