Mail & Guardian
Mail & Guardian

Keep your credit record clean

3 min read

Access to credit has never been easier, with banks falling over themselves to provide credit to customers.

But remember, next time you get a call from a bank to tell you about pre-approved credit, be sceptical. It may tell you that you can afford it, but only you know what you can afford to repay.

The National Credit Act, which came into effect on June 1, is introducing wide-ranging changes to the way financial institutions can lend money. One is that it will be more difficult for banks to offer ‘pre-approved” credit. Your creditworthiness will also be assessed according to how much credit you have. So even if you don’t use the full credit offered on your Edgars account, it could count against you when making an application to buy a car or a home. Either you would be declined or the interest charged would be higher. So now is a good time to go through your debts and credit lines and start getting financially healthy.

It must be remembered that the more you borrow, the higher will be your repayments, the more interest and fees you pay and the less disposable income you have, says Venete Klein, executive director of the Absa Group.

Being over-indebted brings stress and may leave you with a sense of hopelessness. Unmanaged debt can land you in trouble and that is why it is crucial that you be pro-active and make a plan to get yourself out of it.

  • Klein says the first line of defence is knowledge. Know each debt, its terms of repayment, and your obligations. Also know the costs of the credit, in terms of the fees and interest you are paying each month on each debt.

  • Use available cash and increase repayment amounts to pay off the debt with the highest interest rate
  • One way to manage your repayments is to consolidate all small debts so that you have only one creditor — the bank. But, make sure you do your homework. Check that the overall interest and fees are less than the total on your individual accounts.

  • The quickest way to get out of debt is to be disciplined when it comes to spending. Remember that real happiness and success come with managing what we have — not trying to have things we really cannot afford.

  • Klein says that consumers must avoid ‘get rich quick” schemes, such as pyramid schemes. They have many names, many disguises and some variations. But they are all very dangerous.

  • Plan carefully when buying items of necessity such as clothing and food. Buying these on account means credit, which has to be paid back.

  • If you miss a payment, interest costs go up — and you get a bad credit record, which will limit your ability to obtain credit in the future.

    • Buying on hire purchase, too, may seem like an attractive option because the expense is spread over a period of time. But in the end you are paying more for what you are buying, and this can place a long-term strain on your budget.