Introduction to credit – the pros and cons

Buying on credit enables you to use goods or services while you pay for them; almost everyone needs to make use of credit at some stage.

Buying on credit enables you to use goods or services while you pay for them; almost everyone needs to make use of credit at some stage.

The main reason most people use credit is that they don’t have the cash available to pay the total cost of an item or service. For example, most people need to apply for mortgage bonds to buy their homes.

Take note: credit is not a form of increased income, or a means to buy what you can’t afford. There is a limit to the amount creditors will be prepared to lend you and buying on credit costs more than paying cash in the long run. This is because interest and other charges are added to the purchase price of the item you are buying.

Comparing interest rates from different lenders before you buy on credit can help you save on the interest you will pay. You may think a higher interest rate won’t make much difference, but over the lifetime of the loan the total amount paid for the item will be significantly more than if you negotiated a lower interest rate.

Some of the pros of using credit are:

  • You can buy things that you need now even though you don’t have enough money to pay for them.
  • You could save money by taking advantage of special low prices or being rewarded by certain loyalty offers such as cash back or store points.
  • Credit can help in case of emergencies, such as unemployment, illness or the death of a breadwinner.
  • Using credit enables you to establish a credit profile with the credit bureaus, which allows access to further credit, provided you manage your repayments responsibly.

Some cons of using credit are:

  • You may be tempted to take out more than you can afford.
  • You owe money that must be repaid from future income.
  • Credit is not free! The cost of paying charges and interest on your payments can quickly add up.

The most sensible plan is to use credit wisely and be responsible. Part of that is knowing where you stand with your credit accounts. Compuscan’s www.mycreditcheck.co.za offers free full credit reports. On your report you can find your account payment history, balance and instalments which can help you better manage your finances.