Many of us have heard about the word credit but not a lot of us know what it means without ‘card’ at the end. Stepping out of Dezemba may have you realising that you’ve reached or gone over your limit. Possibly making you feel anxious with plenty of questions on what implications this might have on your name. But don’t you worry, we’ve got you covered.
Credit is a common way to transact in everyday reality, from buying groceries to clothes, cars, gadgets and houses. It’s one of those words that are not easy to boil down. But the long and short of it is that an institution lends you money or gives you something of value, makes you sign a contractual agreement and trusts that you will pay back later, with interest. Credit also relates to how suitable you are to be considered to receive financial credit based on your credit score.
Types of credit?
There are two types of credit. Secured credit and unsecured credit. Secured credit is backed by collateral such as a car, house or boat and comes at lower interest rates because of the additional guarantee that you’ll pay back the loan. Failure to pay allows the bank to seize your collateral and sell it to regain their money. Unsecured credit comes with no collateral which usually leads to higher interest rates. The most common unsecured credit is the credit card, medical aid or student loans. Failure to pay these leads to banks reporting a delinquent balance to a credit bureau, suing in court, involving a third-party debt collector or asking for the court’s permission to trim your wages.
What’s the point of credit?
Berniece Hieckmann, Head of Metropolitan Get up shares that “There are very few people who have built up a good asset base without exposing themselves to credit at some point in their life. The reality is that most people cannot save enough (or quickly enough) to buy a house, or a car, or a business.” Credit helps you build a good credit score. A good credit score can give you financial power and if financial freedom is one of your goals for the future it’s advisable to build one. Your credit score enables financial institutions to assess how you handle money and how to determine your credit limits, interest rates and other matters related to lending you money. When you can consistently pay back the money you borrowed on time, banks and lending institutions become likely to lower your interest rates and approve higher limits.
What does it mean when credit goes bad?
The downside of credit is a bad credit score. While you can survive on it, you definitely won’t thrive until you manage to get the score up. Surviving bad credit is not cheap because you get penalized with high interest rates and lower credit limits. Your credit score is lowered by delayed payments on accounts, struggling to payback the money you’ve borrowed, defaulting on loans, or filing for bankruptcy. You can always work your way out of it, but it’s better to take precautions.
How to make credit work for you?
While it’s commonly advised to use credit only when you have to, consider using it to your advantage by feeling on top of it rather than feeling like it’s just a necessary evil. Be sure to use money that you know you can pay back in full by the end of the month. Use your credit card for day-to-day spending, leverage on the rewards offered with some credit cards and choose reward options that suit your lifestyle. It’s also really important that you join contractual agreements that you can pay up consistently. Berniece further advises that “what is important is that your decision to use credit is well informed and affordable. Careful research and sound advice can help you make the right choices and prevent you from spiraling into a debt trap.”
A bad credit score is not cute, but used strategically you can find yourself improving your financial health, managing your money impressively and enjoying some dope rewards.
An important tip from Berniece: never take credit on impulse or in the moment. If you encounter a situation where credit is offered, ask for information and give yourself at least a day to think about the short, medium and long term implications of the cost of the credit on your financial situation. Soundboard your decision with someone you trust and respect.”
