Credit is a sensitive topic that can evoke a wide range of emotions from consumers. There are positive and negative experience people may have with credit cards. This is how to best plan your credit journey
Unfortunately, statistics show that nearly 40% of SA consumers listed on credit bureaus have some level of impairment in their credit record. Another view of credit is to examine the R1.7 trillion of consumer-lending by banks and other lenders, which shows that by value, only around 5% of this is classified as non-performing. This apparent discrepancy can be explained by examining the range of lending products from large, low margin mortgages, usually to lower risk customers, to smaller, higher margin unsecured loans, often to higher risk customers.
The most basic fact is that almost everyone starts off with more ‘expensive’ credit products and by showing responsible behaviour, such as using credit products to purchase assets or to fund education rather than a lifestyle and unnecessary luxury items, and building a track record of good repayment can progress to availing of more inexpensive credit in larger amounts over longer terms.
Here is a breakdown each form of credit
The starting point for most consumers in terms of formal sector lending and also by number of accounts is retailer lending/store cards. The reason for this is very simple – retailers don’t actually give you money, but rather provide ‘finance’ against your purchase of goods from their store.
Unsecured credit offered by banks
In terms of unsecured credit products offered by banks in the main, it is useful for consumers to understand their purpose and availability. For most customers, unsecured term loans would be a natural starting point in terms of access to credit. The advantage for the customer is that there is no security or collateral required, and that it is readily available for a wider set of customers.
The size of the loan provided, the term over which it is available as well as the pricing of the loan typically depends on the customer’s credit score. This is why showing a responsible credit repayment profile can greatly assist a consumer to access a greater amount of finance while reducing the cost and/or the repayments. As indicated the range of pricing is wide and good risk clients can obtain well priced loans for relatively big ticket purchases.
Consumers should be cautious though when considering term loans with very long repayment terms ( longer than 60 months) as the total cost of credit can become high. When sourcing such credit, it’s important for consumers to be clear on the purpose of the loan and rather use it for creating longer-term value such as funding education or home-improvement and not for short-term consumption.
Secured credit including mortgages
Vehicle finance is usually the entry product and buying that first car is an experience most consumers cherish for the rest of their lives. Building up a reputable credit record through responsible repayment of unsecured credit, including credit facility products which demonstrate control by the customer, and not being highly indebted are pre-requisites for a meaningful credit journey.
The ‘ultimate’ credit product which is best associated with long-term customer value creation is the home loan (or mortgage). Consumers should keep in mind the objective of one day owning their own property. This goes beyond just being responsible with credit and not being highly indebted, but also putting aside funds for a deposit if required. For an entry-level house, typically a deposit is not required, but customers still need to consider the total costs associated with buying a house, including furniture as it is not recommended to finance furniture if you are considering buying a home!
Some may look at the total amount of interest payable over a period of say 20 years and conclude that mortgage finance is expensive. I believe the perceived high cost should be offset against appreciation of the property value and relative to the cost of renting, which almost invariably results in a better financial outcome by purchasing. Clearly, finance cost is also reduced where the customer can make payments in excess of the minimum amount.
If consumers appreciate the purpose, benefits and cost of various credit products and critically the importance of how they use (and not abuse) credit products, they will extract significant ongoing value from even simple products like the overdraft, credit cards and occasionally term loans, while being able to finance the purchase of key assets like vehicles and homes.
What form of credit do you have and how are you managing to pay it?
Words: Christoph Nieuwoudt, CEO: FNB Consumer Segment