Credit’s reputation has taken a knock, following the sub-prime mortgage crisis in the United States and rising levels of indebtedness in South Africa. But if credit is used constructively it can prove to be a vital tool to assist you with wealth creation. Kay Geldenhuys, property finance processing manager at ooba, offers the following tips for getting credit to work for you.
- Invest in property
Property is a prime example of using good credit for wealth creation as property owners use the bank’s money to finance their purchase, paying off a small portion each month while the property appreciates in capital value. A potential buyer should negotiate the best possible rate concession from the bank — shop around with other lenders to secure the cheapest credit and maximise on an investment.
- Use your credit card wisely
Your credit card allows you to earn interest in your current account while you use the bank’s money to finance your purchases during the month. However, this will only work if you are disciplined and repay the full outstanding balance at the end of each month, to avoid paying interest on your credit card.
- Opt for capital acquisition
Another type of “good” credit would be any other capital acquisition that requires finance from a bank and that you can derive an income from, says Geldenhuys. A capital acquisition could be an investment in machinery or equipment or, of course, investment in property that is income-generating. “Credit for these sorts of assets makes you wealthier, it is only credit borrowed from the bank for luxury purchases like a car or clothing that make you poorer,” says Geldenhuys.
- Consider debt consolidation
Debt consolidation is another example of good credit. Consumers can use the access facility on a home loan to settle their various retail and installment sale accounts. “Your homeloan rate will be much cheaper than the finance rates of your retail or installment sale accounts,” says Geldenhuys.
Spend with wealth creation in mind
Pay a higher installment on your credit facility than the minimum required by the bank to ensure that you attain your wealth creation goal as quickly as possible. For example, a R20 000 lump sum deposited into a million rand bond will save you R118 576 in interest over the loan period, assuming that your interest rate is 10%. This means you will save more than five times the original amount as well as cutting your repayments to 18,8 years on a 20 year bond.
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