Credit refers to an agreement to buy goods or services with the promise to pay for it later, with interest.

The interest part means that you will be paying back more money than you borrowed. Owing money can be a stressful part of life, so learning how to manage credit and avoid debt traps can help you be stress-free.

Want to learn how to manage your credit? Check out our 14 steps:

It is always better to buy things with cash, but, if you must use credit, make sure that it is good credit and not bad credit. Good credit is for something that gains value such as starting a business, while bad credit is for something that loses value such as buying new shoes.

Interest is the extra money the lender charges you to borrow money from them. If you borrow money, you pay interest BUT if you save or invest the money, you earn interest.

When you borrow money you need to look at the TOTAL cost you will be paying, which includes the price of the product or service, the interest, and any administrative fees. Only once you know the total cost that you will be paying, can you see whether you can afford it.

TOP TIP: Use these interest calculators to help you work out the total cost of things.

There are two types of interest: simple interest and compound interest

With simple interest, interest is added on the capital amount borrowed or invested only. With compound interest, interest is added on the capital amount borrowed or invested, plus on interest already earned or already owing form previous months or previous periods.

REMEMBER: If you are investing, then you earn interest.

If you are credit active, then you will have a credit profile. This is a record of how well you pay your credit and accounts.

It’s important to have a good credit profile as this shows you are financially responsible and means you will be able to access credit at competitive rates and on reasonable terms.

To get a good credit profile, do these things:

• Pay your accounts on time every month and pay (at least) the minimum amount (this includes your credit card)
• Close any accounts that you no longer use
• Keep your information, such as your address, up to date
• Contact your creditors if you are unable to pay the required amount
• If you are struggling with debt, apply for help through debt review

Get your credit profile here

Want to learn more about credit management?

We have some helpful radio clips about this topic with key tips about how to tell the difference between “good” and “bad” credit: click here to listen to them.

Check out the recording of our credit and debt webinar to learn even more about this important financial topic here