10 Myths About Credit and Debts
MYTH 1: Credit is bad
TRUTH: No. Credit can be good. You can use it to build wealth. For instance, if you buy a good property in a good location it will appreciate in value over time and once you have paid it off you will own an asset that will keep on gaining in value. Credit cards are useful but you must pay them off in the specified time to avoid paying interest. They are great for hiring cars, making internet purchases, travelling and in cases of emergency.
MYTH 2: If I don’t use credit I won’t be able to buy anything
TRUTH: The vast majority of people would never be able to afford a home or a car without using credit. In the past people could pay cash for these things but no more. The trick is to use credit conservatively and wisely, mainly for things that appreciate in value, such as a good property. For the rest you should save up to pay for things – even a car – with cash, getting a better deal in the process. Discipline is the key to regular saving.
MYTH 3: If my debts get out of hand I will just declare myself insolvent
TRUTH: Declaring yourself bankrupt costs a fortune. The initial legal fees are around R20 000. You can bargain on losing everything you own. Insolvency is a last resort, not an easy way to get out of debt. What’s more, it is a legal process and will be recorded. Insolvency can be used against you for the rest of your life if you do not rehabilitate yourself. It is hard to get a job if you are insolvent. The sale of your assets will have to cover the legal fees and about 25% of everything you owe. Clearly this is not an option for most indebted.
MYTH 4: Messing up your finance makes you a failure
TRUTH: While admitting that your finances are in trouble and that your are responsible for getting them that way, it is also true that most people have not been taught how to manage their finances and how to manage credit, money and debt. The worst thing you can do is give and stop trying to get out of financial trouble. Most financial issues can be remedied if you get the right help. You have to change your mindset and be determined to get out of trouble. That’s half the problem solved right there. Accept our situation and regard your comeback as a learning curve that will empower and educate you, and change your behaviour.
MYTH 5: My finances are great because I am making the minimum monthly repayments
TRUTH: By simply paying the minimum monthly amount on your debt you are extending your payments for several years and paying vast amounts of interest. Always pay for the minimum. If you cannot do so then this is a red flag. If interest rates go up you could find yourself in deep financial trouble. Living on the edge, from payday to payday, is not a sign of financial health.
MYTH 6: I will never be granted credit if I cannot afford it.
TRUTH: Although South Africa’s Credit Legislator has succeeded in curbing reckless lending, many people are still taking on loans and store debt that they cannot afford. For instance, you can be offered a credit card based on mailing lists or credit research. They do not really know your full financial situation. At the end of the day it is your fault if you take on credit that you cannot afford. You have to grow up and delay gratification. Only buy something when you can pay cash for it. Do not get into debt you cannot afford.
MYTH 7: If I sign surety for a loan I will never be required to pay the debt
TRUTH: If you sign surety for someone you are taking on responsibility for the debt. If the person you have signed surety cannot repay the debt then you can be 100% sure that the creditors will come to you for the money. Signing surety is legally binding. It is as if you took on the debt yourself. If you are not prepared to pay the loan and interest in its entirety if the person you have signed surety for defaults, then do not sign surety.
MYTH 8: Taking cash advances from my credit card is okay to tide me over
TRUTH: Do not rob Peter to pay Paul. You cannot recover from one debt by getting into debt somewhere else. When you borrow from your credit card to pay debt you simply create a greater burden for yourself. Somewhere along the line the interest will start mounting and the weight of debt will increase. Rather cut spending or cancel some services and close some accounts to reduce your debt load. A little sacrifice is better than spiralling debt. Self control here is the main thing.
MYTH 9: If I get debt counselling this will not reflect on my credit record
TRUTH: Yes it will. While going for debt counselling will make repaying your debts more manageable you will not get out of paying your bills. All it means is that your creditors will give you longer to repay your debts, at a higher interest rate of course. While you are under debt counselling you will not be able to get further debt and this will be recorded on your credit reports with the credit agencies. So you will never be able to get credit easily again.
MYTH 10: It is impossible to live without credit
TRUTH: Very few people can pay cash for a home or car. However, it is possible to live debt free if you are determined to do so. If you don’t get into to debt on spontaneous purchases such as holidays, fancy cars, gambling, entertainment, etc.) and you pay extra into your mortgage bond and car repayment, you could live debt free after these have been paid. Some people do this by the time they are 40, giving them 20 to 39 years to build up further investments and financial security for life.
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