Responsible CreditDec 092020
Taking credit or in other words, incurring debt is often viewed under a negative light. There are famous sayings “Better to go to bed hungry than to wake up in debt.” or “Every time you borrow money, you are robbing your future self.” These are just a few quotes that highlight the pessimistic outlook many have on the concept of credit or debt. The daunting incidents of foreclosures or repossessions would also make it easy to understand why many adopt such a view. However, in our line of business, we see both ends of the two-sided coin that is credit and thereby recognise the benefits that credit may have when it is used and managed responsibly. We try to make credit work for you!
First, the apparent benefit of credit comes from the spending power that it can provide to many who otherwise would not have the ability to achieve their financial goals at the rate to which they would have in the absence of a loan or credit facility. Additionally, in most modern societies, there is an increasing need for a credit history to obtain not only a loan or mortgage but also to subscribe for certain basic services such as a mobile phone plan. By not having any credit history, which is usually developed by having engaged in credit transactions, a person may be placed at a disadvantage. An institution may request that a deposit be paid by that person to compensate for the uncertainty surrounding their ability to repay a debt as that ability is usually evidenced by their credit history. A credit history serves as a guide or predictor of how a person is likely to repay the current credit transaction they are seeking to enter into and without such a guide, most institutions have to resort to other means to mitigate against what they may view as a potential risk. However, we cannot ignore that with credit there is a risk when it comes to repayment. But life is full of risks and sometimes it is a question of ‘take the risk or lose the chance’.
Being responsible with the use of credit can make credit work for you and in so doing there is a need to ultimately understand the ultimate cost of credit. Prior to obtaining credit, one should ensure that they fully understand the repayment terms. Take time to go through with a representative the specific terms of repayment and consequences of missed payments. Try to understand the interest rate and determine whether the repayment terms make financial sense in considering all those factors and whether it is affordable. In determining the financial sensibility and affordability of the debt, the repayment sums should be placed in your budget, remembering to always budget for more than the minimum amount for repayment. Inquire about whether there are any additional fees as such should also be included. Also, consider whether something occurs that affects the ability to repay for three months whether this will have a detrimental impact on the ability to service the debt moving forward. As it relates to credit cards, if you are unable to clear off the amount extended by the end of the month, calculate the length of time you are likely to take to repay such with the interest that would be incurred, to determine the true cost of the credit card transaction you are seeking to make, then ask yourself whether it is worth it and whether you would likely have to use the card again and thereby increase the amount that the interest rate would be applied to. Once the debt is obtained, try to pay off more than the minimum amount and review statements of the repayment closely and do your reconciliation.