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30 Jul 2012

10 Credit & Debt Myths (Part 1)

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John Vaughan (Financial Advisor) @ Lucid Living

Myth 1: If I don’t use credit, I’ll never be able to buy anything.
If you don’t use credit, you won’t have debt and you will be able to buy things you can realistically afford. Back in the day everyone used cash for purchases, borrowing money was used in the purchase of assets that grew in value – offsetting the cost of interest. Learn to get disciplined and save for things you want. It is much more rewarding to buy something you really want and knowing that its yours, not the banks.

Myth 2: Credit is bad.
Not always. Credit used wisely can be used to build wealth, for example, buying a home and paying it off will eventually give you an asset that will keep on growing in value. Credit cards are very convenient and safe when making purchases/ The trick is to pay them off at the end of each month so you do not pay interest. They are also very handy in the case of an emergency.

Myth 3: I’m a failure because I messed up my finances…
While you have to accept responsibility for your actions and acknowledge that your decisions played a role in getting you into trouble, there is definitely a lack of education when it comes to the topic of effectively managing credit and money. The biggest mistake you can make is to throw in the towel and stop trying to fix things. Most shaky financial situations are fixable, with the right help. The biggest step you will take towards recovery – is to change your mind set. Decide to take responsibility for your financial future and you will be 50% of the way there. Accept your setback, learn from it, and make the effort to change your behaviour.

Myth 4: If my debts are out of control I’ll just file for insolvency.
Insolvency costs money and you will lose virtually everything you own. It should be a last resort, not an easy way out. It is a legal case and a matter of public record, and it can be reported for the rest of your life if you do not apply for rehabilitation. Some employers will not give you a job if you have been insolvent. It can cost around R18,000 just for legal fees. So for most people it is not an option unless the sale of your assets can cover this and the proceeds can raise at least 20% of the outstanding debt.

Myth : Companies will not give me credit if I can’t afford it.
Even though the National Credit Regulator has done an excellent job of preventing lenders from being reckless many people slip through the net and get loans that they can ill afford. At the end of the day the onus is on you to behave responsibly when faced with an offer of credit or the desire to purchase something you can’t afford. The credit card companies are simply making you an offer based on mailing lists or research they have performed. It is your responsibility to determine whether you can afford to accept their offer.

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