By Tokiso TKay Nthebe
As discussed in part one of the blog ‘How to leverage your pay slip and unlock opportunities to create wealth,’ your pay slip gives you access to opportunities such as credit. Before using credit, however, there are several factors to consider which are shared in this blog.
Like with many things, the general perception is that debt is always bad and that financial service providers are out to screw us over when providing loans. Debt is not always bad if you understand how credit works and know how to use it responsibly. You can leverage credit to create wealth, but you must understand the fundamentals that are related to credit i.e. credit scores, interest rate or cost of borrowing and affordability.
What is a credit score?
Your credit score is a three-digit number that tells any financial services provider (FSP) what type of debtor you are. The credit score is influenced by several factors, for example, your credit mix, how you pay your loans, how you conduct your accounts and how you use the credit limits provided. Students, for example, open store accounts with different retailers while studying and use the maximum limit but fail to pay. Since they failed to pay back the money, this affects their credit scores which impacts their applications later in life.
The second consideration is understanding the utilisation of the approved credit limit. Say for example you are approved for a credit limit of R10 000 on your credit card and you constantly utilise the maximum, this gives FSPs the impression that you depend on debt to make ends meet. Clients who seem desperate or vulnerable are often taken advantage of or charged higher interest rates on credit facilities. It is therefore important to utilise and manage the credit limit well as it impacts your credit score. A healthy recommended utilisation is 50 percent (50%) of the approved limit and should be paid back as quickly as possible.
Determine how much interest you are paying.
Another important consideration is to determine how much interest is charged to your credit facilities. A significant number of people do not know the different types of interest rates i.e. simple and compounding interest or fixed and variable interest and take whatever interest rate is offered without negotiating with the FSP. For example, people apply for personal loans or redraw from existing ones, without asking how much interest they are paying on the facility. Personal loans are generally more expensive because they are unsecured loans, compared to home loans which attract a lower interest rate.
Understand the difference between qualifying and affordability.
An interesting topic previously addressed is understanding the difference between qualifying for credit and affording it. Just because the FSP tells you that you qualify for credit does not mean you can afford to take it, mainly because your budget is already committed to other expenses. A question you should always ask before deciding to take up credit or not is to determine if you can comfortably afford the monthly repayments without feeling like you are suffering.
Mistakes to avoid.
- Avoid redrawing on loans if you do not have a plan to acquire income-generating assets or use debt for unproductive spending. Pay off loans and credit cards as quickly as possible.
- Avoid overcommitting your pay slip with too many lines of credit. Many people are overloading their pay slips with things such as personal, car and home loans, overdraft facilities etc.
- Always pay your loan instalments on time and in full. Failure to do so affects your credit score negatively.
In summary, how can your payslip help you unlock opportunities to build wealth?
Your payslip is a ‘resource’ if used wisely and strategically can unlock many opportunities for example:
- You can use the income to start an investment and make monthly contributions to build an investment portfolio. Examples include unit trusts with asset managers, buying shares on different platforms or investing in private companies to earn dividends.
- You can use the payslip to apply for a loan and build a rental property.
- You can use the payslip and apply for a loan to start a side hustle or buy equipment that you can rent out that can make you money.
If you have not been strategic in how to leverage your payslip to unlock opportunities or have been reckless, acknowledge the mistake, forgive yourself and then do something about it. Put a plan in motion to improve the situation – pay off the debt you have taken as quickly as possible, focus on improving your credit score and start that investment.
Listen or watch the full episode of this blog, on My Money Adventures Podcast on YouTube, Spotify, and Apple podcasts. Remember to also subscribe to the FREE email newsletter for personal finance content and tips.
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