Why you should use credit responsibly

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You should use credit responsibly is a mantra we often hear, but it is a fact that growing numbers of South Africans battle to service their debts as tough economic times bite into their wallets.

Many of them could, however, avoid their financial woes by being smarter with the way they use credit.

Credit mistakes

One of the biggest financial mistakes that consumers make is using credit to buy takeaways, groceries and other fast-moving consumer goods because they end up effectively paying far more for their goods with interest and fees, while the payment period lasts long after the goods are a distant memory.

Even worse, if you fall behind on your repayments, it affects your credit rating, which has a negative impact on your ability to get credit in the future, says Craig Newborn, chief executive of Buy Now Pay Later (BNPL) provider, PayJustNow.

“Credit can be a powerful spending tool when you use it wisely. You cannot buy a house, car, furniture or even clothing without it. But it is important to use it smartly and responsibly, so that you have access to credit when you need it most.”

How to manage credit

But when is credit use responsible?

Newborn says when what you buy lasts longer than the time you take to pay off the credit, when you can pay it off as fast as possible and spread the cost of your purchases interest-free.

When the item outlasts the term

“A simple rule of thumb for credit use is that whatever you buy should last longer than the period over which you pay for it,” Newborn says.

If you buy a blanket using BNPL, for example, you pay it off over three months, but the blanket will last you for years. However, if you buy a takeaway or groceries on a credit card, you will have eaten them the same day but you will pay for them for months to come.”

Newborn encourages the use of BNPL as a smart budgeting tool for bigger ticket items that would ordinarily constrain consumers’ available resources if they were to pay for it in one go, such as beds, tyres, winter jackets and inverters.

When you can, pay it off as quickly as possible

If you use a credit card to pay for goods, you should settle the credit card balance in full every month. That way you will avoid interest charges and penalty fees.

“If you cannot settle your credit card in full every month, you should question whether you should use it at all. It is a slippery slope to debt,” says Newborn.

Customers sometimes complain about not being able to buy more products while they have outstanding instalments, but this is simply an example of a stringent credit vetting process that never puts a consumer in a position where they cannot afford the product they buy, says Newborn.

When you can spread the cost of your purchases interest-free

BNPL is rapidly emerging as a cashflow-friendly budgeting tool that helps consumers get the most out of their money without falling further into debt.

It lets shoppers spread the cost of their purchases across three months interest and fee free, while receiving the goods immediately.

“Ongoing interest rate hikes and increasing fuel and food prices mean that ordinary South Africans battle to make ends meet. However, if you do not behave responsibly with credit, you cannot access tools like BNPL, which can be a great budgeting tool for people who want to manage their cash flow effectively,” says Newborn.

The Citizen/Ina Opperman