In the world of banking, there are a multitude of products and processes. This means that there are also a multitude of words, phrases and terms to explain these products and processes. And understanding these terms and concepts can be tricky – especially if you don’t work for a bank or financial institution.
That’s why we’re breaking down key credit terms and concepts in this article. We want to empower our customers with the financial knowledge they need to help them make informed decisions for their financial future.
So, let’s demystify the world of credit...
Credit
Let’s start at the beginning. The Cambridge Dictionary defines ‘credit’ in relation to lending as:
"A method of paying for goods or services at a later time, usually paying interest as well as the original money".
This is why a credit card has the name it does, and why when you take out a loan, it is said that money is “credited” to you. Credit in relation to borrowing, must always be repaid.
Credit score
Your credit score is a number that represents your creditworthiness. It's based on your credit history and provides lenders a prediction of how likely you are to be able to repay a loan (or credit).
Related to your credit score is your credit report, which is a detailed record of your credit history. It includes information about your payment history, outstanding balances, credit applications, and more. Regularly checking your credit report helps you monitor your financial standing.
Find out more about your credit score.
Interest rates
Interest rates determine the cost of your borrowing. A lower interest rate means there will be lower overall loan costs that you have to cover over the life of the loan.
When thinking about interest rates, it's crucial to understand the difference between fixed and variable rates. Fixed rates remain constant, providing stability in repayments, while variable rates can fluctuate based on market conditions. Our personal loans have fixed interest rates, whereas it’s common for home loans to have variable rates.
There’s some information on fixed and variable rates relating to home loans in this article.
Annual percentage rate
APR – Annual Percentage Rate – refers to the cost of your borrowing for a year expressed as a percentage of the credit amount. Unlike a comparison rate, the APR doesn’t include other costs associated with the credit or loan, such as fees.
It is possible for a single credit card to have more than one APR. For example, your cash advance rate may be higher than your purchase rate, so the APRs would be different.
Credit limit
Your credit limit is the maximum amount a lender will allow you to borrow. When you apply for a credit card, for example, you request a limit and the bank or financial institution will assess if you will be able to afford the requested amount. They do this by reviewing your credit score, income and any other debts you may already have.
It's essential that you manage your credit usage responsibly, because your lender will report it and it will influence your credit score and report. As a result, your credit usage can also impact your overall financial health.
Collateral
Some loans are secured by collateral (an asset), such as a vehicle or property. When taking out a secured loan, you agree to use the collateral as security for the lender. This means that if you fail to repay the credit or loan, the lender will be able to seize and sell the collateral to repay the loan.
Find out more about secured and unsecured personal loans.
Credit terms
The credit terms cover the conditions and requirements of a credit agreement between you and the lender. These terms are like a contract, and will include the details of your repayment period, interest rate, any fees, and other conditions that as the borrower you must adhere to.
Reading and understanding the credit terms associated with any loan or credit product before committing to it is very important.
Billing cycle
If you take out a credit card, your billing cycle is the number of days between each of your statements – ordinarily 30 days. It is possible that the billing cycle of your credit card will differ to the interest-free period (if any) that is associated with your credit card.
Find out more about interest-free periods.
Revolving and instalment credit
Revolving credit, like credit cards, allows you to borrow up to a set limit, and then pay the balance in full or make minimum payments to cover the debt. Instalment credit, such as a personal loan or home loan, involves borrowing a specific amount with regular repayments made over the term of the loan.