Tough times lie ahead for many South Africans as electricity and fuel prices continue to rise, and uncertainty over whether the South African Reserve Bank will increase interest rates adds further pressure.
National Debt Counselling Association chairperson, René Moonsamy, warns that the consequences for people with little or no financial wiggle room are already apparent, with applications for debt counselling in April already significantly up compared to last year.
To borrow or not to borrow?
She said people have limited options when faced with rising costs: make use of the ‘two-pot’ pension system to dip into retirement savings, access more credit, or a combination of the two, or seek help from a debt counsellor to restructure debt and get protection from creditors.
“The reality is that we’re going to see people borrowing more,” said Moonsamy. “In this context, understanding debt and the distinction between so-called ‘good’ and ‘bad credit’ is important.
Difference between good and bad credit
She emphasises that credit itself is neutral. “It is not the type of credit that is the issues,” said Moonsamy.
“What characterises it as ‘good’ or ‘bad’ is what it is used for, how much it costs, and whether the consumer can afford it.”
‘Good’ credit is affordable, well-managed and used for productive purposes that improve your long-term financial stability.
“For example, buying a car to get to work or generate an income, furthering your education or paying for a renovation to add value to your house,” she said.
How to keep good credit score
For one to keep good credit, payments should be affordable relative to one’s income, and the interest rates should be in line with a consumer’s risk profile. Also, making payments on time allows you to build a positive financial record.
“Making payments on time will enable you to access financial products at better rates, because your credit score shows you are financially reliable,” said Moonsamy.
“The National Credit Act requires lenders to ensure applicants can afford credit before approving it. At the same time, consumers need to be truthful when applying for credit about their incomes and expenses.”
Unaffordable borrowing
Moonsamy said ‘bad credit’ is unaffordable, high-cost or poorly managed borrowing, usually for short-term consumption that adds no lasting value.
Examples include using credit to fund lifestyle or basic living expenses, or taking new credit to repay old loans.
“In simple terms, ‘good credit’ helps you acquire assets and achieve financial stability and sustainability in the long term, while ‘bad credit’ is usually unaffordable, often used for short-term consumption and damages your credit record.
“There’s nothing inherently wrong with credit. It’s integral to a functioning economy. What’s important to understand is whether it benefits you or not.”
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