Knowing Credit: The Basics [Part 5/7] Shopping Around for Credit

Welcome back! Last week, we discussed taking the decision to apply for credit. If you missed last week’s article, feel free to review it by clicking here. This week, we’ll be talking about shopping around to get the best interest rate for you. Definitions of the week: FIXED, VARIABLE, and PRIME RATES A fixed rate is an interest rate that is fixed (stays the same) for a specific time period. A variable rate is an interest rate which varies depending on the market rates or economic conditions. A prime rate is the lowest interest rate at which a company lends money, usually to favoured consumers.

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  When buying appliances, cars, or even groceries, the majority of consumers shop around. Why would taking out credit be any different? Most of us can easily name more than five different banks or lenders. Why would we settle on taking out credit from one without considering the others? I wouldn’t, and you shouldn’t either. When considering credit there are a variety of questions you should ask yourself, these include:

• What is my credit score?
• Do I really need it?
• Can I afford the repayments?
• How does the interest rate affect the repayments?
• Which lender offers me the best interest rate?

The first step in answering these questions is to go to www.mycreditcheck.co.za and subscribe to receive your monthly credit report. From this report you will see your credit score, credit history, and repayment history. Your credit report can help you decide whether you should take out more credit. Use your credit report in combination with your monthly and yearly budgets to determine if you can afford the repayments.

Do your research! Most banks and lending institutions will have a variety of credit solutions. Compare each product, their respective interest rates and repayment conditions. This information will better inform your decision on credit provider.

A word of warning, make sure the interest rate is suitable to your budgetary needs. A variable interest rate is beneficial only if interest rates are on the decline. If interest rates are increasing, a fixed rate would be better. Once you’ve selected an appropriate provider, make sure you can afford the repayments at the indicated interest rate. There are a variety of affordability calculators online that take the amount, interest rate, duration of repayment and even your salary into account. These can be helpful as they avoid making a formal inquiry into the credit available to you. Multiple formal credit requests can damage your credit score. To better inform your decision to take out credit, come back next week to learn more about ‘good’ versus ‘bad’ types of credit.