Introduction

Contributed by SigourneyDrane and current to 27 July 2018

What is credit?

Credit involves the referral of debt.

This generally involves:

• one party (debtor or borrower) receiving a benefit from another party (creditor or credit provider ); and
• the debtor being contractually bound to pay the creditor for the benefit at a later point in time in cash, often together with accompanying interest, fees and charges added by the creditor.

The use of credit in Australia has increased dramatically over the last few decades. Consumers regularly use credit to purchase personal, domestic and household items.

Credit is almost always more expensive than cash as the debtor pays the creditor for the use of the borrowed money by paying interest, fees and charges, in addition to repaying the borrowed money.

Types of credit

Consumer credit law is basically contractual in that the creditor and the debtor enter into a legally binding agreement which specifies the terms on which the money will be lent.

The terms of the agreement generally include, but are not limited to, the interest rate, frequency of repayments, fees and charges and procedure for recourse if the debtor defaults.

Home loans

A home loan, also known as a mortgage, is an amount of money advanced by a creditor to the debtor for the purpose of purchasing a property. In return, the creditor will take security over the property for the life of the loan.
A home loan can be used to purchase a house or apartment that is already built, an off the plan property (before the property is built) or a vacant block of land to build a property on.
Typically, a home loan will be for a term of 25 to 30 years and is repaid by the debtor through regular weekly, fortnight or monthly instalments.
There are a number of different types of home loans in Australia, categorised by purpose or interest rate. The two most common home loans are "variable rate home loans" and "fixed rate home loans".
It is important to consider your personal and financial circumstances in order to find a home loan that suited to your individual needs and lifestyle.

Credit cards

Credit cards allow for multiple advances of credit up to a limit for a set number of interest free days before payment is required in full.
There are some credit cards however that do not have interest fee days and interest is charged on all purchases from the date the purchase is made.
Interest is usually charged when you are no longer receiving the benefit of the interest fees days on your card because:

• you have not repaid the full closing balance by the due date; or
• you have an outstanding balance on your credit card from a balance transfer or introductory purchase rate offer.

Interest is generally calculated on the balance owing and on a daily basis, with interest charged monthly.

Personal loans

A personal loan is often used to finance the purchase of a motor vehicle or boat, fund a holiday or home renovations or consolidate debt, amongst many other things.
A personal loan generally involves the repayment of borrowed money by equal instalments over a specified period of time, together with interest, fess and charges.
When applying for a personal loan, a creditor may look at your credit report and request that you provide payslips, bank account statements and other financial information so that it can verify your ability to repay the borrowed funds.

Personal loans may be secured or unsecured:

• Secured loans may offer lower interest rates, higher borrowing rates and longer repayment terms than unsecured loans, but are protected by an asset or collateral of some type. In the event you default on payment of the loan, the creditor may (in some circumstances) sell the asset to repay the debt.
• Unsecured loans do not require you to put up an asset or collateral as security, however the interest rate may be higher as the creditor is taking a greater risk in lending the money.

Personal loans generally have lower interest rates than credit cards, however these rates may still be higher than other types of credit. Fees and charges may also be higher.

Overdrafts

An overdraft is another form of credit, generally used for short-term needs. You may apply to a creditor for an overdraft or receive one as part of your account. Overdrafts may be arranged or unarranged.

Arranged overdrafts may be pre-arranged with a creditor on your personal bank account, home loan account or business account. Limits may vary and you may be charged interest, fees and charges on the amount of money you use from your overdraft. A personal overdraft may be secured or unsecured.

Unarranged overdrafts or accidental overdrafts occur when you overdraw your account, the result being a negative balance. A creditor may lend the money anyway, creating a debt. Depending on the terms of your credit contract, the debt may attract fees and charges and the overdrawn amount may be required to be repaid immediately.

Lease

A lease is essentially a contract that allows you (lessee) to hire or rent an item from the owner of that item (lessor) for a specified period of time in exchange for regular rental payments until the term of the lease expires. A lessee has no right to own the goods under the lease.

Some lessors may allow lessees purchase the item or a similar item at the end of the lease, but there is no right to do so. If the lease provides for this then, by law, the most the lessor can charge is the retail price of the item, plus 48%.

Consumer leases generally have low weekly, fortnightly or monthly payments, however these payments can quickly add up and renting an item becomes expensive. Compare the total cost of renting the item with the total cost of purchasing the item outright before entering into a lease.

Hire purchase agreement

A hire purchase agreement is similar to a lease, however, at the expiry of the term of the agreement, the hirer is entitled to own or purchase the item.

The hirer does not own the item during the course of the agreement, and ownership rights rest with the rental provider. Compare the total cost of renting and purchasing the item with the total cost of purchasing the item outright before entering into a hire purchase agreement.

Buy now, pay later services

Buy now, pay later payment services such as Afterpay, Certegy and ZipPay are offered by approved retailers and allow consumers to delay payment or pay by instalments for goods over a period of time.

These services are available online or in store at the time of checkout and require you to provide banking or credit card details the first time you use these services so your payments can be deducted. You may also be required to pay a deposit or the first instalment at the time of initial purchase.

Buy now, pay later payment services are often advertised as "interest-free", however fees and charges may apply if you are unable to make the repayments on time. Other fees may include account keeping fees and payment processing fees.

Interest fee deals

Major department stores often offer interest free deals that allow consumers to take home items with the promise to pay for them at a later date. Sometimes a deposit may be required at the time of initial purchase.

Different retailers offer different deals, which can generally be repaid by regular instalments over the course of the interest fee period or by deferred payment at the end of the interest fee period.

Consider the terms of your contract, noting that if you only pay the minimum monthly repayment, you may not repay the entirety of the debt before the expiration of the interest free period and you may be charged interest if you miss a payment or fail to pay off the debt within the required time.

Payday loans

Generally speaking, payday loans are small amounts of money loaned to debtors at high interest rates.

Payday loans may also be referred to as "small amount credit contracts" and are:

• provided by a non authorised-deposit taking institution,
• for amounts less than less than $2,000.00; and
• for a term of between 16 days and one year.

You will usually be required to repay a payday loan by direct debit from your bank account or directly from your pay on the day you are paid.

The fees and charges on payday lending are capped, with payday lenders being allowed to charge up to 20% of the amount borrowed as an establishment fee and a monthly fee of 4% of the amount borrowed. Government fees, default fees and enforcement expenses may also apply and payday lenders are not allowed to charge interest on the loan.

Payday lenders are also prohibited from charging direct debit fees on payday loans entered into from 1 February 2017. Payday loans taken out before this date are subject to direct debit fees for the life of the loan.

If you default on a payday loan, you may be charged a default fee. The maximum amount in default fees that a payday lender can charge is twice the amount of the loan, inclusive of any repayments you have made under the contract plus default fees.

Credit terminology: understanding your liability

Understanding terms commonly used in credit contracts is key to understanding your contractual rights and obligations.

Some commonly used terms and their meanings are set out below.

• Amount Financed or Amount of Credit: The amount the debtor is required to repay, excluding interest. This amount can include fees, charges and the cost of insurance policies, as well as the amount borrowed.
• Credit Charge: The amount of interest the debtor is required to pay over the life of the loan.
• Fixed Interest: The interest rate will remain the same for the term of the credit contract.
• Variable Interest: The interest rate may change over the term of the credit contract. The interest rate can increase or decrease.
• Security: An asset provided to the creditor by the debtor as security for the loan. When the debtor fails to meet their obligations under the credit contract, the creditor may recover the whole or a portion of the debt owed from the sale of the secured asset.
• Consumer Credit Insurance: The debtor is insured for loan repayments in the event the debtor is unable to work and make the loan repayments due accident, illness, and/or unemployment.
• Mortgage Indemnity Insurance: An insurance policy between a creditor and an insurer, with the insurance premium paid by the debtor. If the debtor fails to meet their obligations under the credit contract, the property secured by the loan is sold and the proceeds of sale are applied reduce the amount outstanding under the loan. If the proceeds are insufficient to pay out the loan, the insurer will cover the shortfall amount. The insurer then has the right to pursue the debtor for the amount paid by the insurer to the creditor.
• Default: A debtor is in default under a credit contract when they fail to meet their obligations under that credit contract. The credit contract may enable to the creditor to exercise certain rights against a debtor when the debtor is in default.
• Enforcement Expense: A charge made by the creditor to the debtor in relation to action taken by the creditor to enforce the credit contract when the debtor is in default.
• Early Termination Fee: A charge made by the creditor to the debtor if the debtor pays out the loan before the expiry of the term of the credit contract. The formula for the calculation of an early termination fee is often found in the credit contract.
• Establishment Fees: A fee charged by the creditor for the cost of setting up the loan. The establishment fee can vary amongst credit providers and depend upon the amount of the loan and particular features of the loan.

Co-borrowers, joint and several liability

Borrowers may be referred to as "co-borrowers" where there is more than one party named as a debtor under a credit contract. Each co-borrower is liable to the creditor for the whole of the debt, fees, charges, interest and enforcement expenses.

If there is a default, the creditor can pursue either or all of the co-borrowers until the debt is paid.
If one co-borrower dies or becomes a bankrupt, the other co-borrowers are liable for the debt.

Guarantors

A guarantee is a contract between a creditor and a guarantor by which a guarantor agrees with the creditor to pay the debt if the debtor is unable to pay. The guarantee is security for the performance of the debtor's obligations under the credit contract.

A creditor may require additional security by way of guarantee if it believes there is a risk that the debtor may not be able to meet its obligations under the credit contract.

A guarantor may also be required to provide security for their obligations by way of a mortgage over an asset owned by the guarantor.

If the debtor does not meet its obligations under the credit contract then the creditor may sell the guarantor's asset to recover the debt owed by the debtor.

Accelerated payment on default

A credit contract may contain a term that requires the debtor to pay out the balance of the credit contract immediately if certain conditions are met.

A creditor is generally not entitled to demand payment of the total balance outstanding under the credit contract unless there is an acceleration clause in the credit contract.

An acceleration clause is a provision in a credit contract under which the credit provider can demand that the debtor pay out the credit contract immediately, even in circumstances where the debtor is not in default.

Under an acceleration clause, a debtor's obligation to pay the debt by way of instalments due at certain dates is "accelerated" and the whole amount becomes due and payable immediately.

The NCC imposes restrictions on how acceleration clauses can operate (see sections 93, 179G and 204 of the NCC).

Mortgages

A mortgage entitles a creditor (mortgagee) to take possession and sell the property of a debtor (mortgagor) if the mortgagor fails to comply with an obligation under the credit contract.

If the mortgagor fails to meet its obligations under the credit contract then the mortgagee has the ability to take possession of the mortgaged property and sell the property, subject to any legislative restrictions. The proceeds of the sale of the property may be applied to the amount outstanding under the credit contract.

Credit assessment and reporting

If you have ever applied for credit then you will have a credit file.

Your credit file contains information about your credit history and can be used by credit providers to assist in assessing your ability to repay credit when you make an application. Credit files may also be used by debt collectors to locate missing debtors.

Your credit file contains information collected from credit providers, courts and other organisations by credit reporting agencies. Information may include, but is not limited to:

• personal details;
• credit accounts held;
• arrears brought up to date
• defaults and other credit infringements;
• credit applications;
• debt agreements such as court judgments, bankruptcies or personal insolvency agreements in your name;
• credit liability information;
• repayment history;
• commercial credit applications; and
• report requests.

A credit reporting agency's use and disclosure of credit information files is controlled and limited by the Privacy Act 1988 (Cth) and the Code of Conduct issued by the Privacy Commissioner under the Privacy Act 1988 (Cth).

Access to information held by a credit reporting agency is restricted to credit providers and individual consumers only.

Your credit file may contain negative information which can affect your ability to obtain credit. If you do not make a payment on a debt, the credit provider may report your debt to a credit reporting agency and request that the default be recorded on your credit file.

A credit provider may only report your debt if:

• the default amount is $150.00 or more;
• you are a "confirmed missing debtor" or "clearout", meaning the credit provider cannot contact you;
• 60 days or more have passed since the due date for payment; and
• the credit provider has asked you to pay the debt either in person or in writing.

The credit provider must notify you that it may lodge a report about the overdue payment before it does so.

A default listing will remain on your credit file for five years or, in the case of bankruptcy or a serious credit infringement, seven years. The listing will remain on your credit file even if you have made the payment, however it will be updated to show that payment has been made.

If you wish to dispute a listing, you should contact the credit provider in the first instance and raise the dispute with the credit provider's internal dispute resolution department. If you are not satisfied with the outcome, further options include:

• for listings may made prior to 12 March 2014, a dispute can be lodged with the credit reporting bodies that will assess the validity of the listing. Complaints can also be made to Office of the Australian Information Commissioner; or
• for listings made after 12 March 2014, a dispute can be lodged with either the Financial Ombudsman Service or to the Credit and Investments Ombudsman depending on which scheme the credit reporting body is a member of.

You can obtain a free copy of your credit report each year to ensure it is accurate (My Credit File: https://www.mycreditfile.com.au, Check your Credit: https://www.checkyourcredit.com.au).

It is a common misconception that if you do not have a borrowing history or a good credit rating then you will be ineligible for finance.

Many borrowers enter into low value, high interest rate loans to establish a borrowing history and good credit rating even if they do not require the credit.

However, credit reporting agencies do not record positive information about your past payment history; they only provide negative information.

Whilst credit providers will take into account your past credit experience, this is only one relevant factor in assessing your ability to obtain credit. Credit providers are mostly concerned with your financial stability and capacity to make repayments, together with the quality of the security offered.

Dealing with debt collectors

You may be contacted by a debt collector if you fail to make repayments on your loan, credit card or utility bills or have other outstanding debts.
A debt collector may be a person from a credit or service provider or from a debt collection agency.
Debt collectors may contact you in writing, by telephone, in person or by social media.

The conduct of creditors and debt collectors is regulated by the Debt Collection Guidelines, which limits the location, hours and frequency of contact and communications with third parties.

Restrictions on contact include:

• No contact on national public holidays.
• Telephone: No more than three times per week or ten times per month. Unless agreed otherwise, debt collectors can only call you between 7:30 am – 9:00 pm on weekdays and 9:00 am – 9:00 pm on weekends.
• In person: No more than once per month between 9:00 am – 9:00 pm (weekdays and weekends). Debt collectors should only visit your home if repayment arrangements cannot be worked out over the telephone, by email or in writing or you fail to respond to other attempts to contact you.
• Social media and email: If a debt collector uses email, social media or similar technology to contact you about a debt, they must be reasonably sure that the account is not shared with another person and that their message cannot be viewed by anyone except you.

Debt collectors are required to respect your rights to privacy and must not reveal that they are a debt collector or provide information about your financial situation to another person without your permission.

If you are contacted by a debt collector, it is important to ascertain whether the debt collector:

• acts on behalf of the credit provider to which you owe the debt; or
• has purchased the debt from the credit provider, meaning that you now owe the debt to the debt collector.

If you are unable to pay the debt and wish to negotiate a repayment plan, it is important to know which party is owed the debt.

The Debt Collection Guidelines encourage debt collectors to work with debtors to negotiate repayment plans. Possible negotiations may include paying off the debt by instalments or paying a portion of the debt in a lump sum in return for the remaining balance being waived.

Behaviour by the debt collectors should not be threatening, intimidating or abusive. If you feel as though you are being harassed by a debt collector then you may be able to make a complaint to the debt collector's internal resolution department or, if the debt collector is an agent of the credit provider, the creditor's internal dispute resolution department.

If you are not satisfied with the response, you may wish to complain to the debt collector's or credit provider's (as the case may be) external dispute resolution scheme.

If your debt relates to a financial product or service, you may wish to also complain to ASIC. If your debt relates to a non-financial product or service, you may wish to also complain to ACCC.

If six or more years have passed since you last acknowledged or made a payment towards a debt and there has not been a court judgment against you then the debt may be statute barred, meaning that the debt collector may not threaten you with legal action if you do not pay the debt.