By Dominique Bowen
There’s a saying: “Nothing in life is certain, except death and taxes.” A strong case can be made for adding the need or use of credit to this list of life’s certainties. Whether you’re hiring a car, signing up for online learning, or heck, even caught without cash at a national toll gate, a credit card is one of those things without which we increasingly seem not to be able to get by.
Of course, cash remains king, but when you’re plodding your way through the eight-day weeks of Januworry, and there’s far too much month at the end of your money, credit – whether a card or store account – can be tempting. “The two biggest reasons we see for new credit being taken out at the beginning of the year are as a result of the impact of expenses over the festive season, and general annual costs that are incurred at the start of the year, such as school expenses for parents,” says Debt Rescue chief executive Neil Roets.
In some instances, accepting an offer of credit from a reputable lender is necessary and even smart for building that all-important credit record. “A good credit record means better personalised interest rates, which is beneficial in reducing the cost of credit when applying for credit [in the future] such as a home loan,” says a Capitec Bank spokesperson.
To find out whether accepting an offer is the right choice for you and your family’s finances, ask some key questions:
Do I (really) need it?
If a lender has made you a credit offer, the most powerful question you can ask to help and protect yourself is whether you truly need it. Feelings can flood and skew this decision-making process, so to help, Ricardo Teixeira, a Certified Financial Planner at BDO Wealth Advisers, recommends putting your intentions with a credit offer under a microscope to find out whether it would be classified as good, necessary or bad debt.
“When you own something that generates an income and it either maintains or appreciates in value over the long term, then the cash flow from this asset can be applied to paying the debt. Mortgages and business asset finance are examples of such good debt.
“There are times in our lives when an unplanned or unexpected situation arises, and we need to close a financial gap created by a life event. Taking on credit to close the gap between your available cash and your necessary spending does happen and is necessary to save the day, but should be the exception rather than the fallback position,” Teixeira says.
A credit card can offer immediate financial relief while simultaneously helping build your credit history if used responsibly, so it can be necessary to your finances in more than one way, says Capitec.
However, more often than not, debt is used to maintain a lifestyle. “It’s when you use credit to pay for the pleasure longer than what you got to enjoy the item or moment for.”
Do I understand the terms of the agreement?
As a consumer, it’s vital that you act as your own advocate to fully and comfortably understand the responsibility you’re committing to when signing on that dotted line. You are not compelled to sign the offer as soon as your credit application is approved; instead, take it home, read it over, come back with questions for the consultant if you’re uncertain about jargon or lingo you don’t understand or need clarification on, and, if you are sure about it, only then should you accept and sign it. Capitec recommends also asking about the options available for repayment of your credit card, and any benefits attached to this.
What is the total cost of credit?
“When obtaining credit, it is necessary to understand the actual cost of credit,” says Roets. “The total cost of credit includes any initiation fees, monthly charges, the interest rate and repayment term,” he explains. This also links back to the comparison between good, necessary and bad debt: if the total amount you repay is astronomically larger than the amount you originally borrow, this suggests the total cost of credit is quite high, and that the agreement is perhaps not worth pursuing.
The total cost of credit also determines your monthly repayments, so ask yourself whether you can feasibly afford the repayments of the agreement. Teixeira recommends factoring in the possibility of a 3%-plus increase in interest to ensure your repayment plan is watertight.
“It isn’t always realistically possible not to use credit, but understanding the true cost of credit will make the decision easier as to whether it is the right choice for a specific situation,” Roets says.