TAKING on credit in tough economic times might seem like a financial decision to steer clear of. However, credit taken for the right reasons and in a responsible manner can assist you in bettering your life.
If taking on credit is carefully considered and well budgeted for, it can assist you to better your life. A wise money management tip is to include income fluctuations when budgeting to ensure that you can continue to repay your credit obligations in tougher times – it will also help you to take only the amount of credit you really need as opposed to the maximum available to you.
Combine this with using credit for the right reasons, such as renovations or assisting with education, and you can add value to your life.
Since credit will have a long-term impact on your budget with ongoing monthly repayments to uphold, consider these five things as part of your decision to take up credit:
Why do you need credit?
Before approaching a bank to apply for credit, you should have a clear idea of what you need it for. When you know why you are borrowing, you can choose the right credit product for your needs and apply for an amount that matches the expense. If you find that you are no longer able to live within your budget, the first port of call is to review your budget and spending and cut expenses. This could free up cash flow, resulting in your applying for a lower credit amount than you initially thought you needed.
Understand the different types of unsecured credit available
Once you have made the decision to apply for credit, choose the type of credit best suited for your needs. A credit card is for day-to-day transacting, while a personal loan could be the right fit for those who need to pay for larger expenses such as renovating or education and want to know what their monthly repayment will be. If your concern is that you don’t not have enough funds available for next month’s debit orders, then a facility linked to your current account will help you bridge your finances from one month to the next.
Responsible lenders will always caution against taking out any form of credit to pay for other credit repayments – using credit to service credit can easily spiral into debt levels that become unmanageable. Instead, go back to your budget and tighten your financial belt or consider switching your credit into a single loan to simplify your repayments and potentially free up cash flow.
Consider the fees associated with the credit
Different types of credit have different fee structures. Servicing credit includes an initiation fee and monthly servicing or admin costs. Some types of credit will also include insurance fees. Don’t forget to take these into account together with the amount borrowed and repayment interest rate.
Be mindful of interest rates
An interest rate is an amount that the bank or financial institution charges because you are borrowing the money from them - it is charged on top of the money loaned. Having a good credit record, which suggests that you are a reliable consumer to lend to, could mean that you get a more favourable interest rate. Remember that different financial institutions use different credit models to assess the creditworthiness of consumers and therefore the interest rates might differ.
Consumers are encouraged to make sure that they understand the interest rates applicable to the credit they take up as well as the part that interest plays in the full cost of credit.
Consider the length of the loan and how you plan to pay it off
Before signing any credit agreement, it is highly advisable for consumers to ask questions, and understand what they are committing themselves to. Ideally, you want to choose credit that can offer you the lowest possible interest rate at a repayment term that you can manage. Remember to take unforeseen circumstances into account.
Emma Mer, chief executive of FNB Loans
The views expressed here are not necessarily those of IOL or of title sites.
PERSONAL FINANCE