Good and Bad Credit – What’s the Difference?
Some form of credit – whether a phone contract or a credit card – is largely unavoidable these days. Managed correctly, credit can be a lifeline when you need it most.
But according to debt specialists, Debt Rescue, 58% of South Africans struggle to pay their credit card payments each month.
Data released by the Reserve Bank earlier this year further shows that total consumer debt now stands at close to R1.73 trillion. To ensure that you’re not part of these statistics, you need to manage your credit responsibly and educate yourself on the difference between good and bad credit.
The Difference Lies in Using Credit Wisely
Simply put, “Good credit is credit that you can afford and use to buy things that you need. Bad credit is credit that you can’t afford and you use it for things that you don’t need,” says Lebogang Selibi, Media Relations Officer for the National Credit Regulator. An example of using credit wisely is when you have an unexpected issue with your car or a medical emergency, and you use credit to cover the costs, committing to paying back the monthly instalments timeously.
Using credit to buy things like groceries, a lavish new wardrobe or tickets to a concert is irresponsible. Those costs should come out of your monthly budget or be something that you have saved for.
So, Is (Good) Credit a Good Idea?
A positive credit rating will stand you in good stead for when you want to apply for a car, home or business loan, or even a new cell phone contract. “Many people have been taught to save for what they want and never get into debt, but if you have no credit history, there’s nothing to show that you’re a responsible borrower who can manage balances and payments,” says Rudi Botha, CEO of BetterBond. “It’s better to maintain at least one active account, like a phone or rent account, that you are careful to pay in full and on time every month.” Access to credit can lead to temptation – so you need to keep your wits about you.
What If It Goes Bad?
If you find that you’re in over your head with your credit, speak to your creditors to find a payment plan. Your financial planner may also be able to help you put together an action plan, and to review your financial situation. Don’t just avoid the problem and hope that it will go away – you need to take action. Also, check your credit score at least once a year.
Everyone is entitled to a free annual credit report via the various credit bureaus. “Our advice to consumers is, if you have experienced unexpected expenses and are struggling to meet your debt-repayment obligations, speak to your lending institution,” says Lee Naik, Chief Executive Officer of TransUnion South Africa.
Can I Pay off Debt and Save Simultaneously?
Yes – but there’s a catch. “While using credit should never be at the expense of a savings plan, an important decision is whether to use any excess cash to pay off your debt or contribute further to your savings. By downloading your credit report you get a clear, holistic view of your financial landscape (as the lenders see it).
Your credit score is a good indication of the manageability of the various loans and credit facilities in your portfolio. If you find that you are heavily over-indebted it may be necessary to prioritise paying off that debt, but if your credit score is in the good to excellent range, savings could become a priority.”
Speak to a financial planner for personalised, expert financial advice.
This article was prepared by Sanlam Reality.