Credit cards - the basics

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.

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

There is no easy definition for "credit".

In general credit will be attached to a contract that requires a consumer 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.

It is common for the supplier of the goods to be bought on credit to arrange the finance. This is a potential conflict of interest that could work against your welfare. In these cases it is sometimes 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.

Be very careful to check the documentation that is filled in on the application for credit. When you sign the application it is as though you completed it, no matter who filled in the form. There are also criminal penalties that may attach to false declarations - be careful!

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 with an explanation. Again, it is much better to check what you sign before you get into trouble. Of course you can also first get legal advice.

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.

• ask yourself why the lender demands 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.

There are no hard and fast rules about the amount of credit or its cost - this varies amongst credit providers. Make an assessment concerning the affordability of the credit at the time that the contract is entered into, not later. Be especially careful when the contract is supplier credit.

It is possible to take out credit insurance. This will provide protection for the borrower should they (for instance) fall ill or become unemployed. The credit provider can only compel the borrower to take out insurance in limited circumstances.

Read this: This fact sheet is intended to be general information about the law in Australia. It is not a substitute for legal or other professional advice. LAwscape Communications Pty Ltd, F2 Australia & New Zealand Pty Ltd or Moneymanager does not accept responsibility for loss to any person, who either acts or does not act because of this fact sheet.

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