You've heard of credit cards and mortgages...but what is credit and how does it fit in with your money goals?
So you’ve most probably heard of a credit card (god bless you, rewards points), you’ve heard of a mortgage (god damn you, rising house prices) and you’ve heard of a car loan.
These are all very common types of what we call ‘credit’.
Let’s take a step back.
Credit allows you to borrow money so that you can buy something now and pay for it later. Kinda sounds familiar huh?
It basically means that you’re not spending your own money, you’re spending someone else’s money (*cough* your bank or lender).
But unfortunately nothing in life comes for free...so you’ll need to pay the lender back over time, often with interest.
Spot on. Credit is money that your bank or financial institution lends you, with the understanding that you’re going to pay it back later. It can be things like:
We’ve all got different financial goals right now and in the long term. Sometimes, we may not have the money in our bank accounts to achieve those goals.
For example, using ‘credit’ to buy a home is one of the most common ways to achieve a long term financial goal - this credit is called a ‘home loan’. Not all of us can pay for our houses in cold-hard cash like J Biebs or Rihanna.
Also, if you want to go to uni, but can’t afford to pay the fees upfront (who the hell can?!), a HECS loan will help you get your degree. Again, this is a loan from the government so that you can learn today, but pay back the loan later (hopefully once you’re rolling in cash!).
Credit can be exciting. But when those repayments roll in...it ain’t all glitz and glamour.
Before you apply for credit, you should ask yourself questions like:
Making an application for credit will affect your credit score.
Often applying for credit alone isn’t a sign of irresponsible borrowing. However, applying for too much credit in a short period of time, or failing to meet your repayments, is. And if you seem like an irresponsible borrower, it could be tougher for you to get access to finance when you need it.
Keep checking the Flux app this week. We'll teach ya all about what helps (and hurts) your credit score.
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