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How to manage credit wisely

Responsible credit usage can help you achieve important financial goals. We explain how to use credit wisely.

27 June 2024 · Fiona Zerbst

How to manage credit wisely

South Africans are increasingly turning to credit to make ends meet. However, to use credit wisely, you need to be aware of the pros and cons of borrowing.

Financial experts explain how you can maintain a good credit profile and use credit to improve your situation.

Tip: Do you qualify for credit? Register to check your credit score today.

How can using credit responsibly help you? 

Using credit responsibly can open doors for you. Building a solid credit history will, for example, stand you in good stead should you need to borrow for a significant purchase, says Dee Chetty, chief product officer at TransUnion South Africa.

Examples might include buying a home, paying for your education, or starting a new business – items that are generally unattainable with cash alone.

However, many South Africans rely on credit to survive from one month to the next, which places them in a vulnerable position. It’s essential to control your credit use to avoid being plunged into debt.

What does it mean to be responsible with your money, and credit use?

The following actions will help you to manage your money and credit responsibly.

  • Live within your means. This effectively means spending less than you earn.
  • Draw up a budget and/or spending plan. This will help you avoid making impulse purchases and overspending. Learn to differentiate between wants and needs, and cut back spending on unnecessary or luxury items.
  • Save for emergencies. Having money saved up will help you avoid going into debt when unexpected costs arise. Senzo Nsibande, CEO of FNB Card, says you can use savings from your budget adjustment (as per the step above) to pay off your most expensive loans, such as microloans or unsecured loans.
  • Pay your bills on time. Late payments can result in fees and penalties, and harm your credit score. Setting up automatic payments or reminders can help you to avoid this.
  • Borrow only when you know you can afford to repay. This includes making payments in full and on time.
  • Monitor your credit report. This can help you be proactive about maintaining a good credit score and acting if it drops. Having a good credit score can save you money on interest.
  • Plan for the future. This entails setting financial goals, such as saving for a home deposit, your children’s education, or retirement.

“It’s important to have sufficient savings for emergencies or ad hoc expenses, and to manage your monthly cash flow to ensure you don’t overspend and drive yourself into debt,” says Tinus van der Linde, head of credit at Discovery Bank. “Use credit efficiently and responsibly while maintaining a sustainable payment plan,” he advises.

Spending less than you earn, saving regularly, insuring yourself against adverse events, paying off your property, and investing long-term to achieve financial wellbeing are further actions that Van der Linde recommends.

Why do you need a credit card?

Credit cards are designed for transacting up to a set spending limit. These products offer a small line of credit that is easier to obtain than a car or home loan. Using them responsibly can help you qualify for larger purchases with better interest rates in the future, says Nsibande.

Van der Linde adds that future credit approvals are likely to be faster if you manage your credit well.

Credit cards offer a range of benefits, including interest-free periods for purchases, structured budget facilities, competitive interest rates, and rewards programmes.

“[These products] provide customers with an easy, convenient, rewarding way to make purchases throughout the month,” Van der Linde says, noting that they can also provide financial security in an emergency.

Healthy credit spending: When to use your credit card, and when not to

In many circumstances, using a credit card is beneficial or advisable, provided you manage your spending carefully.

It’s crucial to avoid using your credit card for cash advances, gambling, rent, or home loan payments, or small purchases that may affect your credit utilisation ratio – this being the amount of available credit that you use. It’s also advisable not to use it to fund financial instruments, particularly risky investments.

Larger purchases

An interest-free period on qualifying transactions can help you finance larger purchases you would otherwise have had to save up for, Van der Linde points out.

Nsibande notes that you can repay over six to 60 months, depending on the monthly instalments your budget can accommodate. Using your credit card’s budget facility, you can convert the amount owing into an instalment plan. For example, you can pay off a new fridge costing R6,000 over six months by paying a fixed amount of R1,000 a month. Note, however, that budget transactions will attract interest from day one.

Some credit card providers offer purchase protection against theft or accidental damage, but check with your provider – don’t assume that you’re covered.

Travel costs

Credit cards are widely accepted when travelling, and are safer than carrying large amounts of cash. 

Perks for travellers often include complimentary global travel insurance, airport lounge access, discounts with selected travel partners, and reduced currency conversion fees for overseas purchases, when using a credit card for applicable purchases. 

Insurance may cover emergency medical and related expenses, and travel and luggage delays; however, it’s important to check the limitations.

As relates to overseas transactions, Nsibande cautions, “some [credit card] payments with global companies denominated in rands appear to be local but are billed [as foreign transactions]. These transactions attract costs related to international processing.” Banks may charge a payment fee to recover these costs.

Emergencies

Using your card for unexpected medical bills, car repairs, funeral costs, or last-minute flights can relieve financial pressure, and flexible repayment terms can help you manage your cash flow. 

Having the flexibility to “spread” large costs to suit your affordability can be helpful, says Nsibande. 

However, it’s important to exercise caution when using your credit card. You’ll incur interest if you can’t pay off the total amount owing by the due date, since the unpaid amount will be rolled over to the next billing cycle as a revolving balance.

Because credit card interest can be high, compound interest charges may well increase your overall debt.

Top ways to use a credit card responsibly 

Credit cards offer many benefits, but to make the most of them, you need to use them wisely. Here are some ways to do this.

Pay your credit card balance in full every month 

Paying your balance in full every month is the golden rule of responsible credit card use – doing so means you avoid incurring interest, says Van der Linde.

If you treat your credit card like a debit card, and not like “free money”, you can make significant gains.

Van der Linde recommends setting up a debit order to settle your account and choosing to have the total outstanding amount debited every month, so you can continue to access credit card benefits and build a good credit score.

Chetty advises paying the outstanding amount on time, or even a bit before the due date, whether you’re paying off your credit card or paying towards a personal loan. “Payment behaviour plays a significant role in calculating your credit score,” he says.

Paying more than the minimum each month is also wise as it can help lower your monthly repayments, reduce the interest owing, and give you better control of your cash flow.

If you maintain a positive credit card balance, you can benefit somewhat from interest – but be aware that a credit card is not a traditional savings vehicle.

Do not “max out” your credit card

If you’ve “maxed out” your credit card, it means you’ve spent all the credit available on your card.

When this happens, you will have no further credit on your card, which leaves you vulnerable in an emergency. You may also be liable for penalty fees imposed by your credit provider. If you can’t repay the full amount in time, you will forego your interest-free benefit.

In addition, if your credit utilisation is above 30% of what’s available to you, your credit score may be affected. To a lender, high credit utilisation indicates a strong reliance on credit, which is risky. If your financial situation changes, for example, can you still afford to repay your debt?

“Don’t push your limits – aim to use less than 30% of the credit available to you, which shows lenders that you can exercise restraint and you’re capable of responsible financial behaviour,” advises Chetty.

Nsibande notes, “Pre-funding is a good way to manage funds to ensure you don’t go outside your budget.”

Use your credit card rewards well

Credit card rewards and discounts can be substantial, and using them smartly can help you save money. 

Find out which rewards, cashback, and loyalty programmes are available to you, and what you can do to maximise the benefits.

Typical cashback and deals relate to car rentals, hotel accommodation, travel discounts, food and fuel offers, vouchers, and complimentary meals.

Read an article about the A-Z of credit cards, including the benefits and rewards they offer.

Read your credit card’s terms and conditions 

It’s essential to understand the actual cost of credit, says Nsibande.

“A credit card can be a massive burden if the limit is abused for spending outside your means,” he cautions. “You may need to budget appropriately for interest and other charges.”

Every form of credit, including your credit cards – even when not used – attracts monthly fees, so make sure you can cover the cost of having the credit available.

Nsibande says you may also be charged penalties for non-payment or reaching your credit limit.

Make sure you know the period for interest-free purchases; that is, how long you have to make payments before interest charges kick in.

Know your credit limit and inform yourself about the fees you may have to pay if you reach it.

The credit provider’s terms and conditions will also outline your rights and responsibilities regarding disputes, fraud, or billing errors, for example.

Use alerts and technology

It’s worth setting up payment alerts to help you monitor your spending and control your credit use.

This will help you avoid late payment fees and interest charges, and protect your creditworthiness, as late payments can damage your credit score.

You can set up online account or cell phone alerts, but calendar reminders are also helpful.

The best way to avoid missing payments is to automate them, and have the total balance paid automatically from your bank account every month. This is especially useful if you rely on revolving credit.

Banking apps are packed with features that can help you manage and reduce your spending limit, make payments or transfers, and check your credit status and budget, says Nsibande. You can also use apps to review credit card balances, set up a virtual card to reduce fraud risk, and get alerts for every purchase you make, he adds.

Know your credit score, and check it often

Knowing your credit score and understanding what it means will help you understand which financial products and services you may qualify for.

Managing your credit score can help you access credit in future, especially vehicle finance or a home loan. Apart from significantly increasing your chance of being approved for credit, a good score can also bring down interest costs, says Nsibande. 

This is why spending responsibly, planning your purchases, and tracking your progress are vital.

Some platforms allow you to check your score for free, while others charge a fee but offer additional benefits. Make sure you’re aware of how you can improve your credit score.

Tip: Check your credit score regularly for free, with JustMoney.

Steps to take if you’re struggling with debt

There are several measures you can take to regain control if you’re drowning in debt. These are as follows.

Negotiate with creditors 

The first and most important step is to discuss your situation with your creditors to see if you can reach a mutually acceptable agreement.

You may be able to negotiate lower interest rates, which will make your outstanding debt more manageable. Your creditors may also agree to restructure or consolidate your debt, offer a payment holiday, or propose a partial debt settlement.

Creditors are not obliged to assist but are usually willing to do so because they prefer not to lose long-term customers.

Most credit providers have internal mechanisms to assist customers experiencing financial difficulties,” says Nsibande. “If you find yourself in a difficult situation, the worst thing you can do is avoid your credit providers. Speak to them and try to agree on a reasonable payment arrangement.”

Negotiating with your creditors also ensures they won’t take legal action against you, which could lead to a default judgement or asset repossession. It’s in your best interest to contact them as soon as you experience difficulties with repayments.

Draw up a budget 

Van der Linde recommends preparing a monthly budget to reduce your debt. “Monitor your spending to ensure it’s within budget and cut out all non-essential expenses to preserve your income,” he advises.

If you have equity in your home loan, you can use it to consolidate debt. In addition, you can consider selling your vehicle privately and buying a more affordable car. However, if your car is financed, you may still owe the bank money. In this case, your credit agreement will remain in place until the loan has been settled.

Debt counselling

If you’re overindebted and realise you have little or no chance of making your debt repayments, it’s a good idea to contact a debt counsellor.

You may qualify for this process if:

  • You can’t make the minimum payments on your outstanding debt
  • You rely on credit for basic living expenses such as food, rent, or electricity
  • You have missed repayments
  • You’ve received calls from your creditors demanding payment
  • Your total monthly debt payments exceed 30% to 40% of your gross monthly income

“It’s important to note that debt counselling is a legal process. Before signing up, understand your rights and obligations, as well as the cost implications,” says Nsibande.

“Most credit providers offer information on debt counselling, and you can also access the website of the National Credit Regulator (NCR). This will help you to find a reputable debt counsellor in your area, peruse the fee guidelines for debt review, and find other information.”

In terms of the National Credit Act, you have the right to:

  • Apply for debt counselling and receive legal protection from creditors’ claims during the debt counselling period
  • Have your debt levels frozen, with no additional interest, fees, or other charges levied
  • Have fair and affordable instalment amounts based on your income, expenses, and financial means
  • Have rearranged payment obligations
  • Benefit from debt renegotiation, if your creditors agree
  • Receive a debt clearance certificate once your restructured debts have been settled

Tip: If you’re overwhelmed by debt, consider consolidating your debt to free up cash.

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