I’m sure you have found yourself at the end of one of two conversations regarding credit. The first will come down to the importance of obtaining a ‘good credit rating’ and the other will run along the lines of not falling into the big black hole that is DEBT.
Neither party is wrong. Both arguments have grounds; however, I strongly believe the fine line between managed ‘within-your-means’ credit and out-of-control debt comes down to the individual and their control over their spending.
On average South Africans spend up to 67% of their net income on debt. According to the National Credit Regulator (NCR) unsecured credit agreements increased by 2.64% from the last quarter, credit facilities (credit cards, store cards etc.) increased by 2.31% and short-term credit increased by 4.75%.
Although concerning, the main issue with the sudden surge in credit agreements is the ability of the nation to pay back these loans. In June 2014, the NCR confirmed that of the R22.12 million credit-active consumers 58% are 1-2 months or more in arrears.
As the statistics show South African’s are in some real trouble if we do not control our levels of credit and even more so if we do not curb applications for credit we cannot afford.
The very many options available and easy access to credit facilities such as credit cards, clothing accounts and short-term personal loans can accumulate well beyond a person’s control. Soon what was an innocent ‘in-case-of- emergencies’ decision turns into a toxic debt mix which is hard to bounce back from.
It is so easy to fall into the trap that companies who offer ‘quick-and-easy’ short-term personal loans are setting. The more you become accustomed to utilising these services the easier it becomes for you to lose control of your debt and ultimately your repayments. Furthermore the interest paid on personal short-term loans and credit cards for example can range between 18%-25% – meaning a great deal of your repayment for the term of the loan is interest. Is it not possible to wait and save instead of paying interest that increases the price of the product without adding any other value?
So after that doom and gloom you’re asking – how the heck are you meant to get a good credit rating? Firstly, choose your credit facilities wisely – cell phone contracts are probably the lesser of all evils when looking to start your credit rating. Secondly, remember that credit cards and short-term loans (will help with your rating) should only be utilised in emergency situations. Finally, remember that it is easy to obtain a credit rating but it’s even easier to build up a bad credit rating – and these are not easy to shake off.
So I ask that the next time you pull out your credit card or apply for a quick little loan pause and ask yourself:
- How important is this purchase and have you planned for it?
- Can you afford the monthly repayments comfortably?
- What is the interest repayment of the term and can you reduce the term?
- Is it possible to wait and save for the purchase?
Charlene Irwin CFP ®
BCom (Hons) (UP), Post Grad Dip Financial Planning (UFS).
*** Consolidated is a national financial planning practice with offices in Western Cape, Johannesburg, Tshwane, Eastern Cape and KwaZulu-Natal. Charlene Irwin CFP® is based in Gauteng.
For more information please visit: www.consolidated.co.za