Your first credit card or personal loan: what future-you will need to repay

Key points

• Any credit card or personal loan is described by five numbers: the interest rate, the fees, the limit or loan amount, the repayment cadence and amount, and the total you'd repay. The last is hardest to find and worth asking for.
• A $1,200 purchase on a credit card at 20.99% (illustrative) paid at the minimum only takes about 8 years and 10 months to clear and costs about $1,440 in interest. Cleared over 12 months it costs about $141.
• A personal loan has a fixed amount, rate, repayment and end date. A credit card gives you a reusable limit, which makes it flexible and also makes it easy to carry a balance.
• An application is recorded on your credit report as an enquiry regardless of how it ends, and once an account exists your repayments are reported monthly. Nobody can promise what that does to a score.
• If the repayment wouldn't survive a month of lower income, waiting is a reasonable answer, and so is not borrowing at all.

The paperwork for a first credit card or personal loan puts two numbers in front of you clearly: the limit or the amount, and the repayment. Both are easy to check against what you earn, and if they look as though they fit, it can be tempting to proceed. What the paperwork doesn't show as clearly is what the commitment looks like in a year, when whatever you bought is long forgotten and the repayment is still going. So here we go through the numbers behind any credit product, what an application involves, and what the total comes to.

The five numbers that describe any credit product

The interest rate. What the borrowing costs each year, as a percentage of what you owe. On a personal loan it's often fixed for the term, so the repayment doesn't move. On a credit card the advertised rate is annual, however the calculation runs every day on that day's balance, and how that works has its own explainer.

The fees. These sit outside the rate: an annual or monthly account fee on credit cards, an application or establishment fee on loans, and a late fee on both. A low rate with a high annual fee can cost more than a higher rate without one.

The limit, or the loan amount. On a personal loan this is the amount you receive, fixed on the day it settles. On a credit card it's the most you're able to owe at any point, and the room comes back as you repay it.

When and how much you repay. A personal loan has a set repayment on a set day, weekly, fortnightly or monthly, until the term ends. A credit card has a minimum each month, worked out from what you owe, so it shrinks as the balance does. One has an end date built in, the other continues while there's a balance.

The total you'd repay. The amount borrowed, plus all the interest, plus all the fees. A lender can tell you this before you sign a personal loan, because the schedule is fixed, and the comparison rate gets you closer in the meantime (a percentage that includes interest and most fees). On a credit card it depends on what you repay each month, which is why it's rarely printed.

The total repaid is the number that's hardest to find and the one most worth knowing.

A small purchase that becomes a long repayment

The gap between a repayment and a total shows up fastest on a credit card, because the minimum is set low so it stays affordable in a hard month.

Take a $1,200 purchase on a credit card at 20.99% (illustrative), with nothing else added afterwards. Minimum repayments are set by credit card issuers, and a common formula is the greatest of any amount you're over your limit, 2% of the closing balance rounded down, and $25 – your own card's formula is in its contract. On that formula, at this balance 2% comes to about $24, so the $25 floor applies, and it stays $25 the whole way down.

In the first month the interest comes to $20.99 and the minimum is $25, so $4.01 comes off what you owe. After a year of paying every minimum on time, $300 has gone in and the balance is around $1,147.

Below is that purchase run two ways (illustrative).

Assumptions: a $1,200 balance at 20.99%, no new spending, the rate unchanged and fees excluded, with interest worked out monthly at the annual rate divided by 12 and the minimum modelled on the common formula above. Your own credit card's rate, minimum and fees are in its contract and on your statement.

$112 a month is ~$26 a week, for the same purchase at the same rate on the same credit card, and the only difference between the rows is the size of the repayment. Australian credit card statements are required to show what paying only the minimum would mean, so a version of that first row is printed on your own statement each month.

Credit card or personal loan?

It depends on whether the amount is known and finite (a personal loan has a fixed amount, rate, repayment and end date, which suits a known one-off cost, while a credit card is reusable, which suits ongoing flexibility and is also what makes it easy to carry a balance).

A personal loan gives you the money once. You apply for a specific amount, the lender sets a rate and a term, and the repayment is the same every cycle until it ends. Where you're paying for one thing with a known price (a car, a course, a rental bond), that structure matches the purchase.

A credit card gives you a limit instead, which you can draw on, repay and draw on again. That makes it useful for costs that arrive irregularly, and for clearing the balance in full each month, which on most credit cards means the purchases cost nothing in interest (the conditions have their own explainer). That reusability is also why a balance can persist.

Rates and fees vary widely inside both products, so compare the actual offers in front of you rather than relying on the product category.

What a first application involves, and what gets recorded

A lender assesses your income, your expenses and your existing commitments at the time you apply. Expect to hand over payslips or bank statements, and expect the assessment to count what's already going out each month, including buy now pay later plans and any credit card limits you hold. Lenders apply their own criteria, so what a lender may look at has its own explainer.

The application itself is recorded on your credit report as a credit enquiry, regardless of how it ends. Your report records that an application was made, not whether it was approved, and it stays there for five years. One enquiry is an ordinary event that lenders expect to see. Several in a short window reads as risky to a lender, so if you do apply, it's worth comparing first and making one deliberate application.

If this is your first credit account there may be very little on your report yet, which is normal for someone who hasn't borrowed before. Once an account exists your repayments are reported month by month, and that history stays for two years on a rolling basis. Nobody can promise what any of it does to a score, because Australia's credit reporting bodies calculate scores from your whole report using their own models, so be wary of anyone who promises you an outcome. Checking your own report or score is separate from applying, and it doesn't affect your score.

Pro tip: WeMoney only ever does soft checks, never hard checks, so seeing where you stand does no damage to your credit file and leaves no hard checks a lender can see.

The checklist before you sign

Below is what's worth having answers to before you sign. It's mostly in the contract or key facts sheet, and any of it is fair to ask the lender for.

• What the total repaid comes to. In dollars, over the full term, including interest and fees.
• What happens if you're late. The size of the late fee, and whether a missed repayment gets reported.
• Whether extra repayments are allowed, and what they cost. Some personal loans charge an early repayment fee.
• What the fees come to over a year. A $10 monthly account fee is $120 a year, which on a small balance can be more than the interest.
• What the limit does to what you can borrow later. A lender assessing you for a car loan or a mortgage usually counts your whole credit card limit, not the balance you carry. How limits work has its own explainer.
• Whether you could still make the repayment if your income dropped for a month. Reduced hours, a gap between jobs, or an unplanned bill.

If the answer to that last one is no, waiting is a completely reasonable decision, and so is deciding not to borrow at all. Neither costs you anything. It's also worth having some cash set aside before a repayment starts, so an unexpected cost doesn't land on the credit line you've just opened.

If several debts do build up over time, there are ways to reorganise them into a single loan with one repayment on one date. That's a repair for a problem that already exists, useful to understand before you'd need it rather than something to count on, and what it can change is set out separately.

Whatever you decide, what helps most later is seeing the commitment beside everything else from the start: the repayment, the balance and the date it ends, alongside your income and what else goes out. Connecting your accounts in WeMoney puts that information in one view from day one rather than leaving you to reconstruct it from statements years later.

Sources

• Moneysmart: Credit cards
• Moneysmart: Personal loans
• Moneysmart: Credit scores and reports

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.