Credit Management

What is credit?

Credit refers to an agreement to buy goods or services with the express promise to pay for it later, with interest.

In the past you may have lent something to someone, possibly a tool to a next-door neighbour or a dress to a cousin. When you lent the item you expected the neighbour or cousin to return the item within the time they said they would and in good working condition or in a similar condition as when it was lent out.

We may have lent someone something and had the unfortunate experience of the item being returned in a poor condition, late or never returned at all.

Not returning goods on time or returning them in a worn state, is similar to borrowing money and either not making the repayments on time or not paying the interest on time.

When taking credit from a shop or a bank there are three basic principles:

  1. Paying on time: when taking out a loan or buying items on credit, you will be asked to make repayments on a certain date and a statement will be sent indicating how much you need to pay.
  2. Making the minimum payment: it is important that the minimum payment indicated on your statement is paid and paid no later than the date indicated.
  3. Interest: you will be charged extra money when you borrow money from a bank or micro lender. You are expected to pay the repayment amount as well as the interest on the day due.
loan agreement wagewise
When taking credit from a shop or a bank there are three basic principles:

  1. Paying on time: when taking out a loan or buying items on credit, you will be asked to make repayments on a certain date and a statement will be sent indicating how much you need to pay.
  2. Making the minimum payment: it is important that the minimum payment indicated on your statement is paid and paid no later than the date indicated.
  3. Interest: you will be charged extra money when you borrow money from a bank or micro lender. You are expected to pay the repayment amount as well as the interest on the day due.

Understanding interest

When you take credit there is an assumption that you will repay the debt in good time and that you normally have to pay the bank or shop some additional money as well. This additional money is called interest and you may be charged additional fees on top of this

Understanding how interest works and is calculated is important to help you build your wealth.

The basics of interest:
  1. When you take out credit you have to pay back the money borrowed PLUS the interest
  2. Formal lenders (like banks and credit providers) normally calculate interest over a year-long period. So if you pay a 10% interest rate, this means your interest will be 10% of the full amount owed for a full year.
  3. Some lenders charge interest monthly, this means the credit or loan costs you more as the interest is calculated per month.
debt counselling

Understanding interest

When you take credit there is an assumption that you will repay the debt in good time and that you normally have to pay the bank or shop some additional money as well. This additional money is called interest and you may be charged additional fees on top of this

Understanding how interest works and is calculated is important to help you build your wealth.

The basics of interest:
  1. When you take out credit you have to pay back the money borrowed PLUS the interest
  2. Formal lenders (like banks and credit providers) normally calculate interest over a year-long period. So if you pay a 10% interest rate, this means your interest will be 10% of the full amount owed for a full year.
  3. Some lenders charge interest monthly, this means the credit or loan costs you more as the interest is calculated per month.

HOW TO CALCULATE HOW MUCH INTEREST YOU WILL BE CHARGED

THREE FACTORS THAT INFLUENCE COMPOUND INTEREST

Many financial institutions charge compound interest. Compound interest is interest added on to interest already earned or already owing. When you are saving money compound interest is good for you as your money grows quicker. But when you are charged compound interest on credit then you are paying more and your debt grows quicker.

When calculating compound interest the credit provider will add the interest you were charged in previous years to the total amount borrowed increasing the total amount you owe.

HOW TO CALCULATE HOW MUCH INTEREST YOU WILL BE CHARGED

HOW TO CALCULATE HOW MUCH INTEREST YOU WILL BE CHARGED

THREE FACTORS THAT INFLUENCE COMPOUND INTEREST

Many financial institutions charge compound interest. Compound interest is interest added on to interest already earned or already owing. When you are saving money compound interest is good for you as your money grows quicker. But when you are charged compound interest on credit then you are paying more and your debt grows quicker.

When calculating compound interest the credit provider will add the interest you were charged in previous years to the total amount borrowed increasing the total amount you owe.

DIFFERENCE IN THE AMOUNT OWED WHEN USING COMPOUND INTEREST VS SIMPLE INTEREST

In addition to the differences in interest rates and the period over which the debt is repaid, many credit providers will add additional administrative charges. This can increase the cost of an item significantly so always understand the full cost of the item before signing a loan.

Responsible borrowing

If you have too much debt, or you regularly feel you are avoiding answering or returning phone calls from people you owe money to, you may be over-indebted.

The best way to address this problem is to calculate how much debt you owe on a regular basis. Record the formal institutions (like banks and store cards), informal institutions (like loan sharks) and friends and family that you owe money to. This will help you see exactly how much debt you owe. This is the first step to establishing how to manage your debt.

When you are over-indebted you may find that you don’t have enough money to pay all your debts and other obligations. For many people when they receive their salary they pay off their debts and accounts and there is nothing left to see them through the rest of the month.

If you find yourself in this situation you should consider seeing a debt counsellor. Debt counsellors specialise in helping you to get over your debt and re-establish a good credit rating. Read more about debt counselling here.

responsible borrowing

Responsible borrowing

If you have too much debt, or you regularly feel you are avoiding answering or returning phone calls from people you owe money to, you may be over-indebted.

The best way to address this problem is to calculate how much debt you owe on a regular basis. Record the formal institutions (like banks and store cards), informal institutions (like loan sharks) and friends and family that you owe money to. This will help you see exactly how much debt you owe. This is the first step to establishing how to manage your debt.

When you are over-indebted you may find that you don’t have enough money to pay all your debts and other obligations. For many people when they receive their salary they pay off their debts and accounts and there is nothing left to see them through the rest of the month.

If you find yourself in this situation you should consider seeing a debt counsellor. Debt counsellors specialise in helping you to get over your debt and re-establish a good credit rating. Read more about debt counselling here.

Saver Waya Waya WageWise is a financial literacy initiative of the ASISA Foundation. The WageWise website was largely funded by the Sanlam Foundation.