Bank Better, Live Better
The Credit Boot Camp part 1: The basics of credit05/11/2020
Almost everyone uses credit at some point in their lives, which is why it’s important to understand what it is and how to use it responsibly.
When used wisely, credit can be an important tool to help realise your dreams. In the first instalment of The Credit Boot Camp, we’re looking at the basics of credit.
Credit, plain and simple
In basic terms, credit is the amount of money a credit provider, for example your bank, is willing to lend you. You can then use this money to pay for anything from a new laptop to a car or home that you need, but don’t have the full amount to pay for at hand.
How, and for what, you use credit will affect how much you’ll be allowed to borrow in the future. Very importantly, credit should not be about instant gratification, but should rather be used to improve your life in the longer term.
“For example, using credit to buy a home rather than saving up the full amount makes financial sense,” says financial journalist Maya Fisher-French. “Why? Because a home offers you a place to live, it’s building capital and it’s an asset that is likely to increase in value. Taking on credit is a big decision, but if it’s informed, there’s no need to be anxious.”
Bad credit, on the other hand, doesn’t contribute to your long-term wealth. Using your credit card to buy consumables like takeaway food or clothes, or not remembering what you spent the money on, is problematic. You’ll end up paying interest on this money with nothing to show for your overspending.
“Always ask yourself, are you borrowing money to improve your life? Is there going to be a return on what you’re borrowing money for?” says Fisher-French.
“Remember, bad credit isn’t the problem; bad credit habits are,” says Financial Fitness Bunny, Nicolette Mashile. “A credit card could give you the idea you’ve got money that isn’t yours. I maxed out my first credit card within 3 months because I swiped it for everything. I’ve since learned that it’s important to save and avoid using credit to buy things like clothes or food.
“I’ve also learned that there are many benefits to having a credit card when I use it responsibly. It can be real help in a crisis and it’s possible to easily keep track of your expenses and to manage it on your banking app. Using your credit card wisely can help you to build a good credit record. For those who travel a lot, it’s an efficient way to pay for purchases and free basic travel insurance is a convenient credit card benefit for when you travel abroad.”
Credit costs money
Whenever you use credit, remember that you don’t repay only that amount; you also pay additional costs called interest and fees, Mashile cautions. These fees and rates vary between credit providers, which is why it’s always important to compare the total cost of credit taking into account not only the interest rate but also costs, such as monthly admin fees and credit insurance.
Secured vs unsecured loans
Loans fall under 2 categories: secured and unsecured. A secured loan (such as a home loan or vehicle finance) is attached to collateral or an asset like a car or house. Interest rates are usually lower because the risk for the lender is lower. An unsecured loan (such as a credit card or student loan) isn’t tied to any asset, so the risk is higher for the lender, which means they’ll charge you a slightly higher interest rate.
“There are times when taking out a personal loan is good credit,” says Fisher-French. “For example, you want to renovate your home but you haven’t finished paying off your home loan. Taking out a personal loan to renovate will improve your home and life, so you can see this as good debt.”
Capitec offers personalised, affordable unsecured credit up to R250 000 from 12.9%, over a period of up to 84 months. Personalised means you’ll get the best interest rate based on your credit profile.
The 5 main types of credit
There are 5 basic forms of credit. We’ll unpack each type in different instalments of The Credit Boot Camp, but here’s a quick overview:
Credit card - A credit card lets you borrow money from a bank to make purchases, be those a laptop or a plane ticket. You’ll get a personalised credit limit and interest rate based on your profile and affordability. If you pay back the money you’ve used within the interest-free period, usually 55 days, you won’t be charged any interest. If you don’t, you’ll need to pay the money you owe plus interest. Most credit card interest rates are about 18%, but at Capitec it ranges from 7 to 17.5%, and is based on your credit profile. There are also a number of benefits to a credit card, such as free basic travel insurance.
Access facility - An access facility gives you revolving credit to use how and when you want or need to, whether it’s for an unplanned expense, upgrading your home or paying for your children's education. You apply once-off for this facility, but you have access to the money over your lifetime. This means you can use it whenever you need it as it’s your decision to access the available balance if a need or opportunity presents itself. You’re only charged when you use it.
Capitec offers access facilities of up to R250 000 with a repayment period of up to 60 months.
Home loan - This is a large sum of money borrowed from a bank to buy a house or property. When you take out a home loan, you make a promise to repay what you’ve borrowed, plus interest at an agreed-upon rate, over a specified period of time (usually 20 years). Capitec offers home loans for properties valued up to R5 million over 30 years and has simplified the application process by offering potential clients an easy 4-step online application. This product has one of the fastest application processes in the country, allowing clients to initiate an application in under 5 minutes, alongside highly competitive interest rates.
Personal loan - A personal loan is an amount of money borrowed from a bank that you repay in fixed monthly payments or instalments over a period of time. Capitec offers personal loans of up to R250 000 that are payable over 1 to 84 months, with interest rates from 12.9%.
Vehicle finance - Unsecured vehicle finance gives you the money you need to buy a car. This is similar to a personal loan, which means the interest rate will depend on your profile. Capitec has partnered with WeBuyCars and will finance any car of any age up to R250 000. You can take out a loan either for the full purchase price or to top up your cash deposit. When you pay upfront for your car with an unsecured loan it belongs to you the minute you drive it out of the dealership, instead of your bank until you’ve paid the loan in full.
5 things you can do to be fit for credit
Here are 5 things that can help you get the best interest rate possible.
Don’t miss part 2 of The Credit Boot Camp. Read it here.
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