The real cost of credit. Think before you swipe.

Need to buy a house for your growing family? Have a costly car repair that can’t wait till the end of the month? Credit can be a lifesaver when it comes to having something you really need but can’t immediately pay for or in the case of an emergency. But, if you don’t manage your money properly, credit can also be a dangerous obstacle to growing your wealth.

The truth is that credit isn’t free – in fact, it costs quite a lot. When you get credit with your bank, you are signing up for initiation fees, service fees, and interest on the loan amount. So, if you decide to take on credit – be it in the form of a credit card or a loan agreement – you need to manage that credit properly. Start by understanding the terms and conditions of the credit – these should be explained to you in person and be detailed in the loan documentation such as the pre-agreement. It’s important to be aware of all the costs attached to any credit agreement so that you are not surprised when your monthly repayments come around. 

Here are some of the fees you might incur

1. Initiation fee

A once-off fee that credit providers charge you to enter into the agreement – this can be paid upfront and with no interest or added to your repayments.

2. Interest

The amount charged on the outstanding balance of a credit agreement. This is shown as a percentage of the principal amount. Note that if you only pay the minimum amount on a credit facility like a credit card, you might end up only paying off the interest for a very long time, paying more overall in the long run.

3. Service fees

The credit provider can charge you monthly, annually, or per transaction, for servicing and maintaining the credit agreement.

4. Insurance fees

You might be required to have insurance cover for certain assets, for example, a house or vehicle in order to qualify for the credit. Life insurance for the length of the agreement might also be required in some instances. This is a cost that many individuals forget to factor into their initial purchase. 

When selecting a line of credit, it’s important to consider all your options and select the one that best suits your needs, with careful consideration of the terms and conditions. As independent financial advisers, we specialise in the finances of working professionals and aren’t tied to any one product or provider. This means we can provide you with a private wealth experience that gives you security today and prosperity in the long-term.

Thinking of taking on a line of credit? Contact us first!