\u201cThere are many types of credit and the trick is to understand why you need credit and if it will have a positive effect on your future finances,\u201d said Eunice Sibiya, head of consumer education at FNB.
\nThe very first step to take is to decide if the money you are borrowing will be put to good use.
\n\u201cGood debt is using the credit or money lent to you by a financial institution to improve your financial situation.
\n\u201cThis can be using credit to study, start a business or finance a home.\u201d
\nBad debt is when people use credit to pay for everyday items such as transport, groceries or even settle outstanding debt. This makes everyday life more expensive as they are paying interest on this credit.
\n\u201cRemember that it is not your money that you are spending and you are obliged to pay it back with interest.
\n\u201cThis means whatever items bought on credit, be it shoes, furniture or groceries, will cost you more than if paid for from your salary or savings. In the vast majority of cases these items are not worth the additional premium and you shouldn\u2019t use credit to fund them.\u201d
\nOnce you ascertain that the money you are borrowing will add value, there are various types of loans that are available.
\nA secured loan requires the borrower to provide some sort of guarantee or security for the loan.
\n\u201cSimply put, an asset in the form of a car or a house is signed over as security for the loan.
\n\u201cThis means in the event that you are unable to pay, the creditor has the right to take over ownership.\u201d
\nThese loans usually have a lower interest rate comparatively and are paid over a longer period of time.
\nLoans that don\u2019t require an asset as a guarantee are called unsecured loans. These include overdrafts, credit cards, personal loans and revolving loans. In such cases the creditor will carefully consider the borrower\u2019s history and financial circumstances before granting the loan.
\nThe loan amounts for unsecured credit will usually be less than a secured loan and the interest rate higher. This is because as there is no security, the risk to the lender is higher.
\nInterest and fees are charged on both secured and unsecured credit.
\n\u201cAlways make sure that you know what the interest rate is on the money you have borrowed, the total amount that you are expected to pay back as well as the period you\u2019re expected to pay back the loan,\u201d said Sibiya.
\nWith smart credit knowledge you will be able to use money borrowed to make a positive difference to your financial future.<\/p>\n