Myth : If I don’t use credit, I’ll never be able to buy anything.
If you don’t use credit, you won’t have debt and you will be able to buy things you can realistically afford. Back in the day everyone used cash for purchases, borrowing money was used in the purchase of assets that grew in value –offsetting the cost of interest. Learn to get disciplined and save for things you want. It is much more rewarding to buy something you really want and knowing that its yours, not the banks.
Myth : Credit is bad.
Not always. Credit used wisely can be used to build wealth, for example, buying a home and paying it off will eventually give you an asset that will keep on growing in value. . Credit cards are very convenient and safe when making purchases/ The trick is to pay them off at the end of each month so you do not pay interest. They are also very handy in the case of an emergency.
Myth : I’m a failure because I messed up my finances...
While you have to accept responsibility for your actions and acknowledge that your decisions played a role in getting you into trouble, there is definitely a lack of education when it comes to the topic of effectively managing credit and money. The biggest mistake you can make is to throw in the towel and stop trying to fix things. Most shaky financial situations are fixable, with the right help. The biggest step you will take towards recovery -is to change your mind set. Decide to take responsibility for your financial future and you will be 50% of the way there.. Accept your setback, learn from it, and make the effort to change your behaviour.
Myth : If my debts are out of control I’ll just file for insolvency.
Insolvency costs money and you will lose virtually everything you own. It should be a last resort, not an easy way out. It is a legal case and a matter of public record, and it can be reported for the rest of your life if you do not apply for rehabilitation. Some employers will not give you a job if you have been insolvent. It can cost around R18,000 just for legal fees. So for most people it is not an option unless the sale of your assets can cover this and the proceeds can raise at least 20% of the outstanding debt.
Myth : Companies will not give me credit if I can’t afford it.
Even though the National credit regulator has done an excellent job of preventing lenders from being reckless many people slip through the net and get loans that they can ill afford. At the end of the day the onus is on you to behave responsibly when faced with an offer of credit or the desire to purchase something you can’t afford. The credit card companies are simply making you an offer based on mailing lists or research they have performed. It is your responsibility to determine whether you can afford to accept their offer.
Myth : My finances are fine because I can pay my minimum payments each month.
By just paying the minimum payment on a debt, you extend your payments for many years, paying massive amounts of interest. You should always pay more than the minimum payment and if you find you can’t, then you are at risk of falling behind, a one or two percentage point rise in interest rates can push you over the edge. Living from pay cheque to pay cheque is not a sign of financial well-being.
Myth : It’s okay if I take a cash advance from my cards to keep me from falling...
Some people take cash advances on their credit cards to pay their other creditors ”on time. It is better to fall a little behind than to borrow your way deeper into debt. When you borrow to pay debt you just increase the amount you have to pay the next month because you will now have interest to take care of. Rather shave as much as possible off your budget or cancel some services you are using to pay the debt. A little sacrifice is better than dealing with debt spiralling out of control.
Myth : If I sign surety for a loan, the lender will never come after me.
If you sign surety for someone and they don’t pay you can bet your last rand that the creditors will look to you for the money. A surety is as binding as if you had signed for the loan yourself. Unless you are prepared to repay the loan when the borrower defaults, you should never sign a surety.
Myth: If I get debt counselling it will not affect my credit record.
While going for debt counselling will relieve your financial situation there are two important things you need to know. The first is that it does not mean that you will no longer have to pay your bills. It in essence it gets the creditors to extend the period of your loans. This will result in reduced payments but higher interest fees in the long term. If you apply for debt counselling you will not be able to apply for more credit when you are under supervision and it will be recorded on your credit profile. So in other words it will definitely be an obstacle to you getting credit in the future.
Myth : I can’t live without credit.
While very few people could pay for a home or a car with cash, but it is possible to become debt free if you put your mind and resources to it. If you avoid acquiring debt for lifestyle purchases (holidays, flashy cars entertainment etc) and pay extra into your home and car you could be totally debt free by the age of 40. This gives you a good 20 to 30 years to build up a substantial nest egg and total financial security.
For more financial advice, workshops and articles, go to Iona Minton's financial blog here.