In this article, we will discuss the difference between responsible credit and not-so-responsible credit.

At RD Debt Counselling, we have been working with client’s credit for 10 years and I like to think I have seen it all, but I am still sometimes surprised.

I do understand that when there is financial pressure, people don’t always think about what is going to happen long term, they just want to solve the problem that is in front of them right now.

A typical example of this is a client who came to see me with 6 cellphone contracts, most of which weren’t even used. After we had chatted for a while, she explained that Game gives vouchers when you take a cell phone contract, so you take the contract and then Game gives you an R1 000 to R2 000 voucher with each contract. She had cash flow problems and was buying food with the vouchers for her family. Every time she was short on money, she would take out another cell phone contract.  This solves the problem this month, but next month you need to pay the contract

What I am saying is that some credit is responsible. Let’s be honest, there are very few people who can afford to buy a car or a house for cash. Student loans for education are necessary to give your child the best possible advantage for the future, and if you are starting your own business, to make more money from the money borrowed, then it makes sense.

When you are using credit for most other things it is irresponsible.

Loans or accounts for buying TV’s, beds and hi-fis is irresponsible. Not only because it gets you into the debt trap, but because you pay almost twice as much for the same thing that you could have bought for cash if you had saved for a few months.

Another couple had an excellent income, both husband and wife earned good salaries, together, about R80k, but they bought everything on credit, from bed linen to tvs. They had 5 TV’s, many vehicles including four-wheelers, bikes, caravans, and trailers. I am not saying that you shouldn’t have these things, but lots of nice things on credit equal to lots to pay back every month. When you can afford it there is no stress, but what happened here was that the wife was put on short time for about 3 months and then the problems start because they couldn’t pay the full amount every month, and then the arrears started.

Buying food on credit is a big no-no for me.  If you have to buy food on credit to get through the month, then you are overindebted and you are caught in the debt trap because you do not have enough money to pay for your living expenses after all your other debit orders have gone off your pay at the end of the month.

Buying clothes on credit is also one of those that get out of control for many people. When you buy for cash, you have to stop when the cash runs out. Buying on credit means that you can carry on buying with money you don’t have.

Month-end loans are the most dangerous credit you can get.  Month-end loans were developed for the emergencies in life and you can get quick access to money and sort out the emergency and at the end of the month they take their money from your salary,  but the reality for many people is that they take month end loans every month, and it starts at R2 000 and then you need to pay R2 500 back, (these are not exact numbers, but to illustrate what can happen), so you borrow R2 000 and at the end of the month you are debited R2500, that leaves you short R2 500, so then you need to borrow R2500 and then pay back R3 100, and so the months go on until you are borrowing R5000 and paying back R6000, then you are so stuck in the debt trap, you cannot get out.

Then my worst of the lot, when money is borrowed to go on holiday, and here I’m not talking about when you plan to attend your son’s wedding who now lives in Canada, so you do your planning and go if you can afford the repayments, here I’m talking about people who feel they have to go on holiday to expensive places, but can’t afford it, so they take a loan instead of staying at home, and can’t afford the repayments, but at least they had a holiday and can tell everyone they were in Plett for a week and it cost them R7 500 a day for the house, that’s crazy, take one day's money and have a week of holiday at home, or go camping at Bronkhorstspruit dam, I promise you will have as much fun.

The most irresponsible credit is when you buy something on credit on your name for somebody else who has a bad credit record and asks you to help, I have seen many cases where this is a huge problem,

My favorite story about this is the guy who bought a new GTI for his sister on his name. All went well for the first year or so, and one day he got a message from his sister to say, “I have been retrenched, your GTI is on the pavement outside your house.  He couldn’t afford the extra payments, he didn’t want the car, and to sell a one-year-old GTI, meant that he would lose a whole lot of money.  He applied for debt review and now owns a GTI he never needed or wanted.

So I believe that you need credit for buying a house or a car, Paying for your child's education, or for a business where you are going to make money.

When you are using credit to pay for food clothing, rent, water and lights and other daily living expenses, then you are not using credit correctly.

When I was young (a lot of years ago) there was an airline that had a radio advert which said, Fly now pay later.

And that’s exactly what wrong credit makes us do, we are happy, we are flying, but the problem comes when it is time to pay later.

Catch Russell on East Rand Stereo, every Saturday morning at 08:15.