Forms of Credit

Credit is an essential financial tool in modern economies, allowing individuals and businesses to borrow money with the promise of future repayment.

Store Cards

Description

• Store cards are credit cards specific to retail stores, offering credit for purchases within the issuing store or store group.

Issued By

• Typically issued by retail stores or through a partnership with financial service companies.

Interest

• Generally have higher interest rates compared to standard credit cards.
• Often offer interest-free periods and loyalty points.

Credit Cards

Description

• Credit cards provide a line of revolving credit for general use anywhere that accepts them.

Issued By

• Banks and other financial institutions.

Interest

• Interest rates vary based on the provider and the user's credit history.
• Interest is charged if the balance is not paid in full by the due date.

Overdrafts

Description

• An overdraft allows an account holder to spend more than their account balance up to a pre-agreed limit.

Issued By

• Provided by banks on checking accounts.

Interest

• Interest is charged on the amount overdrawn, usually at a higher rate than regular loans.

Term Loans

Description

• A loan for a specific amount with agreed repayment schedules over a set period.

Issued By

• Banks and financial institutions.

Interest

• Interest rates can be fixed or variable, depending on the loan agreement.

Charge Cards

Description

• Similar to credit cards, but the balance must be paid in full each month.

Issued By

• Financial institutions and specific companies.

Interest

• No interest charges due to the requirement of full monthly payment.

Hire Purchase

Description

• Allows customers to possess and use an item immediately but pay for it in instalments.

Issued By

• Hire purchase agreements are offered by retailers and financing companies.

Interest

• Interest is included in the instalment payments.
• Generally, higher interest rates compared to conventional loans.

Agreement Conditions

• The customer does not own the item until all payments are made.
• Missing payments can lead to repossession of the item.

Factors To Consider When Choosing Credit

Essential Purchase

• Definition: Determining if the item or service is a necessity or a luxury.
• Example: Buying a car for commuting to work versus buying it for leisure purposes.

Interest Rate

• Definition: The percentage charged on the borrowed amount.
• Example: Comparing interest rates from different lenders to find the most cost-effective option.

Hidden Fees

• Definition: Additional charges not included in the advertised cost or interest rate.
• Example: Origination fees, late payment fees, or annual fees that increase the total cost of credit.

Penalties for Missing Credit Repayments

• Definition: Consequences of failing to make timely payments.
• Example: Late fees, increased interest rates, and negative impacts on credit score.

Advantages of Using Credit

1. Convenience

• Facilitates purchases without immediate cash availability.
• Useful in emergencies or unexpected expenses.

2. Build Credit History

• Essential for future loans like mortgages.
• Demonstrates financial responsibility when managed well.

3. Rewards and Benefits

• Cashback, points, or travel rewards.
• Additional benefits like insurance cover on purchases.

4. Purchase Protection

• Offers consumer protection and dispute resolution.
• Fraud protection against unauthorised transactions.

5. Spreading Cost Over Time

• Allows for larger purchases by spreading the cost.
• Manages cash flow effectively.

Disadvantages of Using Credit

1. High-interest Rates and Fees

• Can significantly increase the total repayment amount.
• Variable interest rates can lead to unpredictability in repayments.

2. Debt Accumulation

• Risk of overspending and accumulating unmanageable debt.
• Long-term financial strain.

3. Impact on Credit Score

• Missing payments or maxing out credit limits can damage credit scores.
• Affects future borrowing capability.

4. Temptation to Overspend

• Easy access to credit can lead to impulsive purchases.
• Difficulty in differentiating between wants and needs.

5. Stress and Financial Anxiety

• Managing multiple lines of credit can be stressful.
• Financial insecurity due to debt.