For most of us, borrowing money is an essential part of financial life. From buying a home, to covering unexpected costs, credit can make life run more smoothly, and, when used responsibly, help us to achieve our goals. However, borrowing should clearly be approached with caution. According to a study by Trading Economics, the debt to income ratio of the average South African household has been declining since 2008. Nonetheless, it remains at a relatively high 71.9%. With so much of people’s income going towards debt repayments, it is vital that we use this credit responsibly, squeezing out the best possible value.
Tips for Short-term Credit
Short-term credit is money which you borrow for a relatively short amount of time, such as credit cards, payday loans (provided by companies such as Wonga), and pawn-broker loans. These types of credit tend to have higher interest rates, but are easier to access. Here are a few tips for getting the most out of your short-term credit:
Pay off credit cards in full every month.
Nothing racks up bills like unpaid credit cards. It might be tempting to only pay the minimum amount required on a card each month, but doing so will cost you a huge sum in the long run.
Don’t close your credit card account, even if you are not using it much.
It might sound counterintuitive, but not making use of all the credit that’s available to you is likely to improve your credit score. This activity shows potential lenders that you use credit sparingly, and are not borrowing more than you can afford to pay back. A better credit score will allow you to access lower interest rates and larger sums, meaning future credit will cost you less.
Consider payday loans carefully.
Payday loans can be a great way to bridge the gap when you come across an unexpected expense in the middle of the month. However, like every form of credit, they should be approached with caution. Make sure you have a plan in place for repaying the loan, plus interest, before applying. If you are not entirely sure you will be able to pay it back, you could be better off using a credit card or planned overdraft to cover your cost, as these sometimes have lower interest rates.
Tips for Long-term Credit
Long-term credit, as the name suggests, is borrowed money which you pay back gradually, over a number of years. This could include a personal loan from a bank, car finance, and mortgages. This type of credit is typically offered at much lower interest rates, but your credit score will be an important factor. To get the most out of long-term credit try the following tips:
Don’t churn out too many applications.
When a loan or mortgage application is rejected, it can be tempting to immediately fill in another, but this can actually reduce your chances of getting any credit at all. When you apply for credit, the application is recorded on your credit file, which potential lenders look at when deciding whether to give you a loan, and what interest rate to offer you. Too many applications in a short period of time can make you appear desperate for money, and not an appealing prospect for lenders hoping to make their money back. Instead, if you are rejected, wait for a while and look especially carefully at eligibility criteria before your next application.
Know your credit score.
Knowing your credit score will give you a better idea of how much you can expect to be able to borrow, and what interest rates you are likely to be offered. Knowing where you stand will also allow you to take steps for improving your score. Simple things can hit your credit score surprisingly hard – for example, a mistake in your address will knock it. When you receive your credit score and report, make sure all the details are correct.
Build your credit score.
Credit scores are especially relevant when it comes to long-term credit. Higher interest rates obviously make for more expensive borrowing, but this effect is particularly noticeable for credit borrowed for a number of years. If considering a significant investment, such as buying a home or starting a business, it can be worth waiting a year or two to build your credit score and get a better deal. You can do this by using smaller amounts of credit responsibly, demonstrating your ability to pay back what you owe in a timely fashion.