Written byCredit is the ability to borrow money or receive goods and services now in return for a promise to repay later, usually with interest and fees on agreed terms.
Key points
- Every credit contract has a principal (the amount borrowed), scheduled repayments, interest, and fees such as establishment, late and annual fees.
- Credit is either secured (backed by an asset such as a car or home) or unsecured, and either revolving or instalment.
- Lenders test serviceability: whether your income after living expenses and other debts comfortably covers the repayments, often stress-tested for higher rates or lower income.
- Your repayment behaviour is recorded by credit reporting bodies and summarised as a credit score; missed payments, defaults and frequent hard enquiries lower it.
- Consumer lending is regulated under the NCCP framework: lenders need an Australian credit licence and must meet responsible lending obligations.
How credit works
Credit is a legal and financial contract between a lender and a borrower: the lender provides funds or a payment facility, and the borrower repays on agreed terms. The lender sets a credit limit or loan amount based on your financial profile. Revolving credit, such as a credit card or line of credit, lets you borrow repeatedly up to a limit as you repay, with interest accruing on the outstanding balance. Instalment credit, such as a personal loan or mortgage, provides a lump sum repaid in fixed instalments over a set term.
If you fail to meet repayments, the lender can charge fees, increase the interest, list a default on your credit report and, in serious cases, take enforcement action, including repossession of the asset securing a secured loan.
Common types of credit
Secured credit is backed by collateral, such as a home or car, and default can lead to repossession; a mortgage is the classic example. Unsecured credit has no collateral and relies on your income and credit history; most personal loans and credit cards fall here.
Everyday examples include mortgages (long-term, secured, for property), personal loans (instalment loans for one-off expenses such as a renovation or medical bills), credit cards (revolving, unsecured, for purchases and cash advances), overdrafts (a short-term revolving facility attached to a transaction account), buy now, pay later (short-term instalment credit for retail purchases, often interest-free if paid on time but with late fees) and trade credit, where a supplier lets a business pay later.
How lenders assess you
Lenders weigh your income (payslips, tax returns), living expenses, existing debts including cards and buy now, pay later accounts, credit history, the value and condition of any collateral, and the purpose of the loan. Most run a serviceability test that stress-tests the repayments against higher interest rates or a fall in income.
Enquiries are recorded as soft or hard. A soft enquiry, such as checking your own report or an eligibility check that does not involve a credit enquiry, does not affect your credit record. A hard enquiry from a formal application appears on your report and can slightly affect your score for a period, and a lender pre-approval usually creates one. Consistent on-time repayments improve your score; missed payments, defaults and a run of hard enquiries reduce it, and a stronger score can mean better pricing and easier approval.
Protections and borrowing responsibly
Lending in Australia is regulated. Credit providers under the National Consumer Credit Protection (NCCP) framework must make reasonable inquiries about your situation and must not offer a loan that is unsuitable, and they generally need an Australian credit licence. Contracts must disclose the interest rate, fees, minimum repayments and early repayment conditions. Disputes go first to the lender's internal complaints process and then to the Australian Financial Complaints Authority (AFCA).
Misused credit is costly: late fees, compounding interest, default listings, repossession and debt collection, with defaults and bankruptcies staying on your record for years. Check your credit report before applying, budget for a buffer against rate rises or lower income, compare fees and features, read the contract, and contact your lender early about hardship options if you fall behind.
Not to be confused with
- Loan
- a loan is one form of credit: a lump sum repaid in instalments over a set term; credit also covers revolving facilities such as credit cards and overdrafts
- Credit rating
- a credit rating is an agency's assessment of how likely a government or company is to meet its obligations; credit is the borrowing itself
- Consumer credit
- consumer credit is the personal lending regulated under the NCCP Act; credit as a whole also covers business and trade credit
Frequently asked questions
Does checking my credit hurt my score?
Soft checks, such as looking at your own report, do not affect your score. Hard enquiries, made when you formally apply for credit, appear on your report and can slightly lower your score for a period, particularly if there are several in a short time. A lender pre-approval normally involves a credit enquiry, so it is usually listed.
Can I get credit with bad credit?
Possibly, but your options and pricing may be more limited or expensive. Consider secured loans, finance options designed to rebuild credit, and steps to improve your score first, such as correcting errors on your report and getting existing repayments back on track before you apply.
What happens if I miss a repayment?
The lender will usually charge a late fee, may increase the interest, and can report the missed payment to credit reporting bodies, where it appears in your repayment history. If arrears continue, the lender may list a default and pursue collection or enforcement action, including repossession on a secured loan. Contact the lender early to discuss hardship options.
How long does a default stay on my credit file?
Defaults typically remain on a credit file for several years; the exact period depends on the type of listing and the credit reporting rules. Defaults, court judgments, bankruptcies and debt agreements all make future borrowing harder and more expensive while they are on file, which is why early contact with the lender matters.
Is buy now, pay later the same as a credit card?
No. Buy now, pay later is generally short-term instalment credit for a specific purchase, often interest-free if you pay on time, though late fees can apply. A credit card is revolving credit with ongoing interest on any unpaid balance. Both count as existing debt when a lender assesses you, and both can affect your credit report.
Related terms
Narrower terms: Consumer credit, Revolving credit, Instalment credit, Credit card, Line of credit
Loan
A loan is money advanced by a lender to a borrower, repaid as principal plus interest over an agreed term under a contract.
Read definitionConsumer credit
Consumer credit is a loan, credit card, consumer lease or other credit provided mainly for personal, household or domestic purposes and regulated by the National Credit Code.
Read definitionRevolving credit
Revolving credit is a form of credit that lets you draw, repay and redraw funds up to a pre-set limit, with minimum monthly repayments.
Read definitionInstalment credit
Instalment credit is consumer credit repaid in regular, pre-set payments of principal and interest over a fixed term, reducing the balance to zero or an agreed final amount.
Read definitionCredit card
A credit card is a form of revolving credit that lets you borrow up to a pre-approved limit for purchases, cash advances or short-term finance.
Read definitionCredit rating
A credit rating is an independent assessment of how likely a government, company or debt issue is to meet its obligations on time, graded from AAA down to D.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.