It's almost impossible to live without debt today. Sometimes, getting credit is the only option you have to pay for something you really need. People borrow money for many reasons. The biggest reason is because there is a desire to buy something now and pay for it later.
Credit helps you make big purchases you cannot afford immediately, so you can pay in instalments over time. Credit is important because most people cannot buy a house or a vehicle with cash. In an emergency, credit can be convenient when you have not had time to save enough.
What is credit?
Credit refers to buying something and pay for it later over a specific time, usually with interest. You can get credit only from institutions authorised under the National Credit Act, 34 of 2005, to provide credit to clients. This may include anything from a credit card to a clothing account.
How does credit work?
It's important to understand how credit works so you can use credit responsibly to secure your financial health and achieve your personal goals.
Simply put, when credit is given to someone, they borrow money from a credit provider to use now, but this needs to be paid back over time at a cost. Based on this explanation, credit has 3 elements:
- Risk:
There is always a risk that a person will not be able to pay back the money they borrowed.
- Time:
Money is always borrowed over a period, like 6 or 12 months or longer.
- Costs:
There are always costs involved in borrowing money, like interest, initiation fees, and service fees.
Types of credit
- Personal loan
- Home loan
- Credit card
- Cellphone contract
- Interest-free loan
- Vehicle finance
