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Turn Your Credit into Responsible Credit

By Danelle van Heerde, 18 March 2020

To buy on credit isn’t always necessarily a bad thing. If you use credit responsibly (in other words, good credit), it can enable you to reach your financial goals.

With the help of a financial adviser, you will be able to prioritise your goals and come up with a strategy so your credit can help you to move forward financially. Danelle van Heerde, Head of Advice Processes and Tools at Sanlam, gives five tips.

1. Taking Out a Home Loan

“Buying a house can be a good long-term investment,” says Van Heerde. It’s the type of purchase that will appreciate in value over time, so it’s a responsible credit purchase. The various spokespeople we talked to from the National Executive Committee of the Debt Counsellors Association of South Africa (DCASA) agree. “Most people can’t buy a house for cash, and for the average South African, it is the most important and largest purchase they will make,” the DCASA says.

It’s important to apply the standard investment principles, explains Van Heerde. This requires patience. You won’t get the best returns if you don’t invest wisely – an important consideration for responsible credit. “Make sure you buy in an area with good growth prospects,” she says. Be savvy about knocking down the outstanding balance. “Save for a deposit before you buy,” she continues. “Pay additional money into your bond whenever possible to reduce the total interest you pay.”

When you’ve found a potential property, see if the costs make sense. “Compare the repayments to the rent you would pay if you didn’t buy,” suggests Van Heerde. If the rent amount is more in the long term, then consider buying.

2. Buying a Car

For many South Africans, constraints such as unreliable public transport and the need to commute to work, school and running errands have created a need for independent transport. But this is not an investment purchase. “You pay a lot of interest and other costs, and the value of the vehicle continually declines,” cautions the DCASA.

Van Heerde offers a rule of thumb for responsible credit when it comes to a car: “Stick to an affordable, reliable option. Avoid the temptation to buy a fancy car that is more than you need – your money can work much better for you elsewhere.”

3. Tertiary Education

The same way a property will appreciate in value if cared for properly, a student loan can pave the way towards empowering yourself and your loved ones. This is a great example of responsible credit, if credit is required to pay for these costs.

“Taking out a study loan for tertiary education for yourself or your children is an excellent investment in your career and future earning potential,” says Van Heerde. According to 2017 research conducted by Analytico, which analyses earnings in South Africa, a tertiary education opens the doors for job seekers to earn up to 67% more than they would with only a matric certificate.

4. Emergencies

“If you trash a tyre in a pothole and you need to get to work tomorrow, then you use your credit card. If your child is sick and you want to get them into a private hospital urgently, you need to reserve a minimum on your card,” says the DCASA. While not ideal (first prize is always to have savings stashed away you can dip into); using credit this way is an example of responsible credit.

Life has its nasty surprises – how you bounce back from them is what counts for your finances. This isn’t limited to your credit card. “Access to funds in your home loan or at your bank may be the only way to get through this,” admits Van Heerde. Both agree, though, that for this to remain in the responsible credit category, you should repay the balance as soon as possible to avoid excess interest.

Speak to a financial planner about your cover options in the event of an emergency.

5. Buying an Investment Property

“Many people take out loans to make a profit in the longer term,” the DCASA explains. “If you borrow for a purpose, can pay back the money and still show a profit after interest and costs, then it’s considered responsible credit.”

So, how to go about it the right way with property loans? Do your homework, suggests Van Heerde. “Look at rent and expected capital growth before you buy. Take into account the effort and costs to manage a rental property, whether you do it yourself or outsource it.”

This article was prepared by Sanlam Reality.

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