Understanding the basics of credit

Written by Your Future Now

Are you credit savvy? Do you know how to use credit to help you achieve financial wellness? Credit can be a helpful tool in managing our finances, but only if it is properly understood and appropriately used.

What is credit?

Credit comes in different forms, ranging from overdrafts to car loans and credit cards.

It can be defined as the process of obtaining money, goods or services from a supplier without immediately paying for it. Instead, an agreement is signed that payment will be made in the future, usually with interest and other charges added. Simply put, credit is when someone borrows money from a credit provider to use now, with the agreement that it will be paid back over time at a cost.

The benefits of credit

Credit can empower you to handle emergency financial situations, such as a medical bill or family crisis, but also enable you to seize an opportunity to invest in assets, such as a home or a business, and realise your life dreams. Importantly, when you use credit responsibly, you build a positive credit record that will stand you in good stead in future.

The consequences of credit

Credit is not free. To cover the costs and risks associated with extending credit, the credit provider adds interest, and service and initiation fees to the capital amount you borrow. Credit can become expensive, hence you should only borrow money when you really need it, only borrow the amount you need, and repay your loan as quickly as possible. It is also important to make sure that you can afford the repayments for the full loan period. It is hard to recover once you have missed a couple of installments. You could land yourself in financial difficulties if you do not use credit responsibly and within your means.

Credit certainly has its advantages but also some dangers if not managed responsibly,” says Mark Young, Deputy CEO of Bayport Financial Services. He points out that consumers should never take on more debt than what they can afford, and definitely not use expensive debt, such as a short-term loan, to service cheaper debt, such as a car or home loan instalment. “Rather talk to your credit provider about a payment plan that will help you to restore your financial health without placing you at additional risk, he advises.

The one instance where it does make sense to take out a loan to pay off other debt is when consumers consolidate their liabilities. “Consolidation loans give you an opportunity to settle your expensive debt immediately and then to service only one loan, which will save you fees and bank charges,” says Mark.

Another credit pitfall that consumers have to avoid is using credit for everyday items like groceries or taking out payday loans to fund day-to-day expenses. “This creates a debt trap from which it is very difficult to escape,” says Mark. “If you are struggling to make ends meet, the best you can do is get financial advice from a professional.”

Credit is beneficial for those who have budgeted for repayments and have considered all fees, charges and small print. Reputable and registered credit providers will protect your rights as a consumer and ensure you are fully aware of the financial commitments that come with a credit agreement.

Article Categories:
Consumer Protection · Credit and Debt

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