It's an exciting time – you're finally earning your own pay cheque and proving you can make it on your own. The things you desire most are within financial reach, whether by saving, or by taking out credit.
As tempting as it may be to accept a loan for an item you’ve long been coveting, keeping your debt to manageable levels is one of the most important steps you can take to turn your dreams into reality.
A few common-sense tips will keep help you to avoid becoming overindebted, says Obed Tongoane, manager at the National Credit Regulator (NCR).
Understand the different types of credit, and their cost
The first thing to understand is that debt is not always bad, Tongoane says.
"It's important to build up a credit history so that when you want to apply for a car or home loan, credit providers can see that you can manage your finances responsibly," he says.
However, he cautions, you must ensure you understand the true cost of credit. Unsecured debt, such as credit cards and personal loans, are more expensive than secured debt, where assets such as a house act as security.
This is evidenced by the amount of interest credit providers are allowed to charge for unsecured credit, under the auspices of the National Credit Act (NCA).
On a mortgage agreement, for example, up to 15.75% interest may be charged per annum, based on the current repo rate of 3.75%. Credit cards, store cards and overdrafts, on the other hand, can attract annual interest rates of up to 17.75%.
For unsecured credit transactions, which mainly consist of personal loans, credit providers can charge a maximum interest rate of 24.75% per year. If you are looking at buying a car or furniture, then the maximum interest rate a credit provider can charge is 20.75% annually.
For short-term credit transactions, which are loans of up to R8,000 that are repaid over a maximum of 6 months, you will be charged 5% per month. Should you be late in paying a supplier, an incidental credit agreement may come into force, and these can attract an interest rate of 2% per month.
Credit providers can charge additional costs as stipulated in the National Credit Act, so it’s important to plan for these.
"Budgeting will assist you to keep track of your finances,” says Tongoane. “The idea is to see how much money you have left over at the end of each month after basic expenses. Remember to always draw up a budget and stick to it."
Tongoane notes that creditors are also required to meet specific responsibilities.
“Before extending credit, credit providers are required to conduct an affordability assessment to assess the consumer's understanding of the risks and costs of the proposed credit. The rights and obligations of a consumer under the credit agreement, debt repayment history as a consumer under credit agreements, and the consumer's existing financial means, prospects and obligations, all need to be considered" adds Tongoane.
"When you take up credit, read the small print before you sign up," he advises.
It's tempting to drive a flashy car and wear the latest designer labels, but if you get into a cycle of buying a new car every few years, you'll simply be swapping one loan for another.
"If you're going to borrow, invest in a more concrete asset, such as a home or property," he says.
Know your rights
As a consumer, you have rights and obligations under the National Credit Act. The NCR regulates credit bureaus and the consumer credit information held by them. The act also aims to prevent over-indebtedness, assists over-indebted consumers to restructure their debt, and encourages responsible lending by credit providers.
"Debt counselling will help you to restructure your debts, but remember, you need to continue paying your instalments even when under the process,” Tongoane says.
“Consumers who are facing financial difficulties should try to get help before they default on their repayments."
Reduce your debt over time
If you have negative listings at the credit bureaus, you should aim to rectify these.
"Avoid being tempted by offers of more loans, especially those that target consumers with poor credit records," says Tongoane.
"Unfortunately, there's no quick fix, and cleaning up and moving on can take a while, but it’s possible," he says.
"One of the ways to improve your credit rating is by proving your responsibility over time, paying your instalments on time and not taking on more debt than you can handle," he advises.