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Credit 101

Posted: 16 Nov 2015

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Credit explained

Credit is simply your ability to get stuff or services delivered without you having to pay for it right away. However, nothing in life comes for free – It is based on trust that you are willing and able to pay it back according to a specific agreement and of course with added interest! The big difference comes in when we look at your willingness vs. your ability to pay back a loan. Willingness: you preparedness to make debt and taking responsibility to pay back as per the agreement; Ability: your financial capacity/ability to pay back your debts when taking in consideration your financial responsibilities We know you are willing and able to manage your debt, but do you know the following lingo? Principal Amount: The amount you borrow (how much they are giving you in advance of payment), including interest, fees, collection costs, default administration costs and credit insurance. Loan term or repayment period: The period of time you may access the credit until when you have to repay the full amount. Instalment: When debt is divided into parts, you have to pay an “instalment” according to the agreement (this is usually once a month but can depend on the agreement). Repayment schedule: How often you will make loan payments (in instalments), for example weekly or monthly.

How credit works

No one can drive a car if they don’t know how the gears work. In order to use credit more responsibly and to secure your financial health, you need to know what car you are getting into and how to drive it. There are three main elements to credit: Risk – There is always a risk that a person will not be able to pay the money borrowed back. Time – The money is always borrowed over a period of time i.e. 6 months, 12 months or longer. Costs – There are always costs involved in borrowing money. These costs are interest fees, initiation and service fees.

What is a credit agreement?

It is a legally-binding contract between a lender (credit provider) and borrower (you, the consumer). This agreement allows you to borrow a certain amount of money for a specified period of time. It outlines all the rules and stipulations associated with the contract. It is also includes the details of the borrower and lender, monthly repayments, the loan amount, loan period and interest rate.

What are the different types of credit and how do they work?

Credit Facilities aka Revolving Credit (credit and store cards) This type of credit allows you to have a maximum limit which you can spend (you cannot exceed this limit unless you arrange for it to be extended by the credit provider). Each month, you will receive a statement with the balance of what you owe as well as when and how much (minimum) you should be paying. Credit Transactions / Instalment Credit (personal loans and property mortgages) When taking on Instalment Credit, a credit provider loans you a specific amount of money and you agree to repay the money and interest in regular instalments of a fixed amount over a set period of time.

What is a Credit Guarantee?

When you take responsibility on behalf of another borrower’s credit obligation in terms of a credit facility or a credit transaction, you sign a credit guarantee. This means you will sign a credit agreement as promise to pay should the person you are signing surety for be unable to meet their obligations. In South Africa we also refer to this as “signing surety”. No matter what type of credit you take on, always remember: Borrowing comes at a cost and you need to be able to afford it as much as you are willing to pay!

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