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Monday, May 10, 2021

Financial literacy: Don’t take credit

Capitec Bank

“Don’t take credit” – a seemingly contradictory message coming from a bank. Understanding some of the financial and societal pressures faced by consumers, Capitec Bank has launched an unconventional campaign, featuring Vusi Thembekwayo, that asks South Africans to rethink credit as part of responsibly realising their dreams.

Using credit to fund a flashy lifestyle to show that you’ve arrived won’t help you live better.  What is new today is old tomorrow and you’ll be left with the debt to pay. Rather take credit for the right reasons, such as buying a car or house. It’s the difference between good and bad credit.

What is good credit? Let’s first understand it:

To GET credit, you first have to get credit (meaning, understand it). The starting point is to appreciate the types of credit, their different roles and whether they may be appropriate for you:

The two major types of credit are:

  1. Secured Credit: this is a loan based on borrowing against an asset (a car or house, for example) that you own, which makes it less risky for the lender.
  2. Unsecured credit: this is not secured by an asset. Rather, it’s based on an assessment of the applicant’s consistent income, your banking history and credit behaviour, and ability to afford monthly instalments. In this case, your income acts as the asset.

Here are the different types of secured credit:

  • A mortgage bond: Your credit is secured by the house you’re financing
  • Home equity loan (a type of mortgage bond):  Your credit is secured by your equity in your home.
  • Line of credit: Usually a revolving line of credit (always available credit) that’s secured against your bank funds, house, etc.
  • A car loan: Your vehicle serves as your collateral for a loan.
  • Secured credit card: To get a secured credit card, you put down a cash deposit upfront which usually equates to your credit limit. If you show a good payment history, you could have this increased without adding extra backing funds.

Here are the different types of unsecured credit:

  • Always available credit: this is a revolving line of credit offered by a bank or merchant for an undetermined time. It includes credit like:
  • Credit card: Check the bank fees before you commit. Many credit cards advertise low interest rates on a negative balance, but the real cost is hidden in the fees. Opt for a credit card that lets you earn high interest returns from the first positive balance. Capitec’s credit card links to four savings accounts and lets you earn 4.85% interest per year on a positive balance.
  • Store card: Check the interest rates – store cards often charge you high interest – and look out for hidden fees.
  • Credit facility: Great for unplanned expenses or emergency situations, a credit facility immediately furnishes the applicant with funds.
  • A personal loan (also known as a signature loan): This is usually a fixed instalment loan (meaning you’ll pay a set agreed-upon amount every month) which is based on your credit profile – aka your credit score, current income and behaviour and your ability to manage credit.
  • Student loans: These loans often have grace periods, interest subsidies and flexible repayment options. But not always – sometimes the interest can be quite high. Also, only students qualify. You must prove your acceptance to an accredited tertiary institution. Someone will need to sign surety for the loan (often a parent), and in most cases repayments start once studies are completed.

Olana Bodlo is one such example, where her father could apply for a more affordable option, a low interest rate from 12.9% on a personal loan to fund her through her studies; her story can be watched here:

Once you know what credit you need, check that you’re good for it by getting hold of your latest credit report. For more info on this, check out the first article relating to Give Credit Some Credit Series. On the Capitec banking app, available on Androidand IOS, you can check what you could qualify for. Also make sure you have all the other documentation you need to apply.

Before you apply for credit, think about whether it’ll have a sustained positive outcome:

Ask yourself, are you taking good or bad credit?

If you need useful assets like a car, home improvements, self-development through education or starting a small side business. This may benefit you in the long-term.

Bad credit may bring momentary pleasure but could be financially harmful down the line.

A flashy, unaffordable car; a ‘social-media-worthy’ holiday that’ll be amazing, or a beautiful wedding that’s way beyond what you can afford will have negative consequences for your bank account for the next few years.

A good rule of thumb is to ask yourself, “will the item I’m using credit to buy hold its value for longer than the credit repayments?”

Rethink credit. Don’t take credit unless credit is due.

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