Responsible use of credit can help us achieve our goals. A mortgage or bond – while a debt that exists for a long time – is often the only way most of us can buy a home. Make sure you can afford the repayments, even if the interest rate goes up. And don’t forget insurance and maintenance costs.
Cars are the same. But do you really have to have a brand new car? Is the car you are tempted to buy too big for your needs? Can you afford the repayments, insurance, maintenance and running costs? If you are leasing the car, is there a balloon payment at the end? Will you have to pay in? Can you sell the existing car or use it as a deposit on a later model?
While mortgages and vehicle finance are considered to be ‘necessary’ debt – outside of most consumer’s cash resources – credit card debt, depending on what it is used for – can be considered unnecessary debt.
Here’s a simple guideline:
Good debt produces assets that may be sold in the future – like a house, land, paid off car.
Bad debt is spent on unnecessary or nice-to-have ‘stuff’.
If you are considering getting a credit card, when up to now your cash and or debit cards have covered your needs, you should ask yourself if you are living beyond your needs. Many of the 20.1 million South Africans who are credit ‘active’ have at least four accounts – multiple accounts and their repayments quickly amount to more than they can afford.
While budgeting is always the key to affordability and being ‘liquid’, every now and then an emergency pops up and you simply don’t have the cash. This could be an unexpected home repair, hospital expenses, a sick child and a host of other essentials. If, however, you find your monthly repayments on all your clothing accounts, furniture and credit card accounts, as well as car and mortgage payments are leaving you with no option but to use a credit card to buy food or draw cash for the kids to take to school, you are probably in trouble.
Take time out to assess everything you and your family are paying for on credit. Another simple piece of advice is to keep at least three month’s salary in a savings account that you keep for real emergencies and replace where possible after use. Don’t keep this as cash in the house – open a separate savings account, not linked to your ATM or debit card that you deposit small amounts into – maybe on a stop order on your main account.