There seems to be a rather divisive nature when it comes to credit in society. On the one hand we really shouldn’t spend beyond what we actually earn but that argument doesn’t always stand up to reason – for example buying a new car or getting a home loan, both of which would be almost impossible for the average consumer without credit.
The best place to start to understand credit is to examine the various aspects of it we encounter and make solid, appropriate financial decisions thereafter. These decisions always have way of affecting you further down the line, whether it be through interest or your credit report, so making them correctly the first time is extremely important.
Credit and Debt
Credit is essentially is the act of borrowing money that you have yet to earn, with the idea of paying it back either in one go or over a period of time. The money you pay back is the debt that you owe. So credit and debt are two sides of the same coin – the one goes hand in hand with the other.
There is one by-product of the whole credit-debt cycle that makes most people squirm – interest. Interest is the calculated percentage you agree to pay back on top of the money you have borrowed. So, if you borrow R1000 and plan to pay it back R200 per month for the next 5 months, the lender will add a certain percentage on top of that R200 in order to get some growth on the money he or she has lent you.
The part about interest that makes people so nervous is that it changes. All the time. You have a different interest rate for a personal loan to a home loan, a credit card payment to a payday loan and so on. It is here that the risk of credit becomes real.
For The Record
A common problem most people have with credit is the impact it has on something called your credit report. Now, a credit report is a financial snapshot that shows lenders how you have handled debt in the past. If you have handled it well – paid it off on time and in full – you credit score is generally good. If you have defaulted on payments or maybe have never been in debt at all, your credit score will be poor.
A poor credit report can seriously affect your ability to borrow money in the future for things like a home loan. Banks are not willing to lend money to people who have not displayed an ability to handle money well over a period of time.
One of the most misused and maligned credit products out there is the humble credit card. Now, contrary to popular belief, using a credit card isn’t a bad thing. In fact, it can not only build you a very nice credit report but also earn you rewards like frequent flyers miles and retail discounts.
The credit card is a tool, which, when used correctly, can be of serious benefit. Not only do you often get a period of zero interest but it is essentially a very cheap form of getting a loan. By exercising self-control and the proper budgeting responsibility you can make a credit card work for you in very rewarding ways.
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