Best tips for borrowing smart

Borrowing money can be tricky and even a little scary when you're starting out. So here are some tips on three popular borrowing options and how to use them to your advantage.


The anatomy of borrowing

Borrowing money is one way to help you buy the stuff you need. The trick is to understand how it works, how much it will cost you, and how you'll pay it back over time. 

Borrowing is made up of:

  • Principal and Credit Limit - Principal is the amount you borrow from a bank or lender and a credit limit is the amount of principal you can borrow up to.
  • Interest - The cost charged by the bank or lender for you to borrow the principal.
  • Fees - You may have to pay some fees for borrowing money. These may include processing or admin fees, or a regular fee for the service such as a six monthly credit card account fee.

It's important to pay off what you owe as quickly as you can. This way you'll minimise the interest you may get charged.


Three borrowing options

Whether you need money for day-to-day things, big ticket items or for something unexpected, there are a few different borrowing options that could suit your needs.

  • Overdraft - Access to a "just in case" fund when you need it, right from your everyday account. You can borrow up to an agreed credit limit and this is normally repaid at your own pace, provided it's kept within the credit limit. However, there are certain types of overdrafts which may require repayment in smaller amounts by set dates overtime, or in full by a fixed date.
  • Credit card - A convenient way to buy day-to-day items within your agreed credit limit. You should make the most of interest-free periods on purchases and stay on top of your minimum payments as set out in your statement each month.
  • Personal loan - A fixed loan amount for a specific purpose, with a set repayment plan of regular instalments. Typically this is used for larger purchases that you need to pay off over time.

With an overdraft or credit card it's not necessary to borrow up to your approved credit limit, but you can if you need to. You're responsible for repaying the amount you have borrowed, so just remember, the higher balance, the more interest you will pay.


Overdrafts and how to use them

Arranged overdrafts

An arranged overdraft is a limit you can borrow up to on your everyday account.

It's not unusual to need a bit of a cushion between pay days. This is where an arranged overdraft comes in handy. You don't have to use it, but it's there if you need it.

To qualify for an arranged overdraft you'll have to meet your bank's lending criteria.

Usually, once you've arranged an overdraft, you can leave it or use it when it suits you. If you do go into overdraft, you're charged interest on the amount you owe, for every day it sits unpaid. The interest is charged once a month, but it's calculated every day - so you reduce your interest costs as you pay it off. In addition, there's usually a monthly fee for having the arranged overdraft in place.

Staying in control of your overdraft

You should reduce or pay off your overdraft as soon as you can.

If you're struggling to manage your overdraft, talk to your bank. They may be able to help you get back on track with a regular repayment plan.

Unarranged overdrafts

Please note, it's important to keep an eye on the balance of your bank account. If you spend more than your account balance or more than your arranged overdraft credit limit, then your bank may allow you to go into unarranged overdraft. If this happens, you may be charged additional fees and interest (these costs are usually higher than if you had agreed an overdraft with the bank in advance).


Being smart with your credit card

A credit card can give you flexibility with your borrowing. There are many credit card benefits:

  • A convenient way to pay for everyday purchases in store and online
  • Pay for big-ticket items, like a fridge or furniture
  • It can help you cope with unplanned expenses such as a car mechanic bill, or a trip to the dentist
  • You build a credit history - which may help when applying for loans in the future

How do credit cards work?

Credit cards let you make purchases now and pay for them later. With personal ASB credit cards, if you pay back the full closing balance by the due date on your statement each month, then you can get up to 55 days interest-free on your purchases. However, if you only pay the minimum due amount then you will be charged interest on your purchases - so it's important you're aware of the interest rates and fees for ASB's credit cards and check these out before you apply to ensure the card is right for you.

On your statement you'll see:

  • How much you owe from the previous month, if anything
  • Everything you've purchased since your last statement
  • Any interest, charges or other transactions such as cash advances
  • The minimum amount you have to pay back and the due date you need to pay it by. It's important to check your credit card statement each month to ensure its accuracy. If you notice anything wrong, get in touch with your bank as soon as possible.
  • If you've opted not to receive a printed statement, set a reminder on your phone or use bank alerts to review online and pay your card off on time.

Cash advances

You can use a credit card at an ATM or a branch to get cash. This is called a "cash advance".

ASB charges interest on cash advances at a higher rate than your credit card purchases, from the day you take the cash out. If you do need cash, make sure you pay the cash withdrawal on your credit card back as soon as you can to reduce your interest payments.

Before you apply for an ASB credit card, check that it's right for you by reading the fees and interest rates.


Personal loans - the no surprises approach

A personal loan is an option for one-off, big ticket items, like paying for travel or a new car. You borrow a set amount, for an agreed purpose, and then pay the loan, including interest and fees over an agreed timeframe. You agree to pay off the loan at a set schedule. If you can, arrange the repayments around your pay day to make managing repayments easier.

Consolidating your debt

One popular use for a personal loan is to consolidate your other little debts into one. For example, if you have hire purchase loans, credit cards and other commitments, the repayments can get confusing. They might be at high rates of interest as well, which costs you a lot of money over the long term.

You may be able to simplify life by taking out a personal loan to pay back all your other debt. Then you can focus on one loan to pay back. Instead of lots of little payments at different times and potentially high interest rates, you'll have one manageable payment schedule at the same interest rate. It could save you time and money, and make it a lot easier to keep your finances straight.

For example:

Paying back a personal loan

Before you take out a loan, find out about the repayment schedule – you will need to pay back your loan in regular payments to cover the principal, interest and any fees.

You can usually choose monthly or fortnightly repayments, so you can work them into your budget ahead of time. It’s a good idea to set up repayments for the day after pay day, so you don’t accidentally spend the money you need for loan repayments. If you can afford to make any extra payments, this can help you save money and pay your loan off quicker.

Ready to choose?

Know what you want? You can find out more about the option that's right for you online, or even apply straight away. 

Remember, before you commit to borrowing money, make sure you can afford to pay it back.

Guides to get you there

ASB's lending criteria and terms apply. Credit Cards Conditions of Use apply. The above information is a guide only and should not be relied on as it does not take into account your personal financial situation or goals.

ASBBest tips for borrowing smart