The dangers of building up a credit record

We’ve all struggled with the notion of registering for credit in order to prove how well we manage our finances. But surely no credit is the optimum representation of this?

Apparently not. The theory goes that one is required to display a healthy track record of how to effectively manage debt before they can apply for any more. It does make sense when you consider that a lengthy commitment needs to be made where the management of your instalments counts a great deal.

Those who prefer to work with cash as opposed to credit, often find this process tedious. Especially when the creditor in question requests that you provide proof of previous credit applications, when this, in fact, is the first one you’re applying for. Ah, what is life without its little financial conundrums?!

You will receive credit eventually, albeit a small amount, which you will then go on to pay obediently each month for the next few months. This continues until such time that you have proven your reliability in the credit world. At this stage, your home loan or vehicle financier can consider your credit profile and approve finance for you. Be wary not to approach the same creditor with a “matter-of-fact” smirk on your face that might cause her to delay the process any further. Just a little friendly advice!

Right, so you now have not one, but two lines of credit. I’m not sure if you’ve ever noticed this trend, but typically when you don’t have credit, you spend less. However, when you do have access to credit all of a sudden, all these cash emergencies tend to come about. You no longer have the luxury of time, so all your dishes are piling up at the sink! A dishwasher is clearly the only way to move forward, ergo you decide to swipe your credit card and purchase a dishwasher. What you’ve just done, is taken the first step towards a debt trap.

Generally, a bank will lend you R3,000 worth of credit for every R1,000 that you earn per month. The problem is that you’re then 3 times as likely to struggle with the repayments if you aren’t careful and have poor financial management tendencies. You simply end up repaying it all with added interest. If you’re punctual with your repayments and don’t ever default on them, you might find creditors offering you more credit. At first, you’ll think, why not? This is the second step towards a debt trap.

What is this debt trap that keeps getting mentioned? One morning you have R10,000 credit on your account with a balance of R8,000 and when you look again, suddenly you’re staring at a statement that shows R80,000 credit with a balance of R70,000. How did you get there? It’s the question on every financially-burdened individual’s mind. No one seems to understand at which point it spiralled out of control and they no longer had a handle on their debt. So how did you get there?

You didn’t budget adequately

Subconsciously, you always knew that there was a proverbial cushion for you to lean on when you needed it unexpectedly. The problem was, your version of what defined an emergency changed from the status of no credit to the status of having credit. An emergency was once when you had an unexpected medical bill that you couldn’t afford but had to be treated for, to buying that dishwasher due to a major lack of available time in your daily life to wash the dishes. Where you were once at peace with the fact that you could only clothe yourself in the same outfits each and every day to work, you now had access to funds that ultimately afforded you the opportunity to dress the way you have always wished.

All these slight shifts in mindset that continue to grow as your credit limit does, are the very contributing factors that rendered you confused and perplexed as to how it got so far.

It’s not all sour grapes and pessimism though. Managing a few lines of minimal credit that you can stay in control of, can seriously help you in the future when considering applying for specific loans for desired capitals and investments. The trick is to budget appropriately and avoid taking creditors up on their credit increases. If you can start by doing those two things, you could avoid the debt trap altogether!