Applying for credit: responsible borrowing means taking up only what you can afford
The right credit at the right time can add significant value to your life and your financial wellbeing. But taking out a loan is never a decision to be made lightly.
“The fact that you qualify for credit, does not mean you are ready to take it up,” says Mark Young, deputy CEO at Bayport Financial Services. “Consumers who are unprepared for the responsibilities of credit often do damage to their credit profile and end up with more debt than they can handle. Responsible borrowing means taking up only what you can afford, and paying your account regularly as per your agreement”.
Here are a few important points to bear in mind when you consider applying for a loan:
The National Credit Act states that you have the right to apply for credit, be protected against discrimination in the granting of credit and be given sufficient reasons why your application was declined. You also have the right to documentation written in plain and simple language.
The credit provider’s rights and responsibilities
As part of considering your loan application, the credit provider has the right to ask your permission to access your credit records from a credit bureau. The provider also has the right to turn down your application should it find sufficient reason to do so.
A credit provider’s assessment and decision is based on your credit profile, and the information you provide in your application. It is in your own best interest to be honest and open in your application.
Criteria to obtain credit
Credit providers want to be confident that the credit they grant will be paid back on time and in full. Therefore, they conduct a credit risk assessment using the following criteria:
· Can you repay the loan?
This is a measure of whether you can afford to repay the loan on time, and depends largely on your gross income and expenses.
· What does the economy look like?
A poor economy might make it harder for you to repay the credit. Credit providers consider factors, such as the potential for strikes or retrenchments in your industry, which might affect your job and income.
· Will you pay if you can?
Credit providers also look at your credit behaviour to determine the risk you might pose to them. Here they will assess your credit profile from a credit bureau and will check their own credit records to see how you managed your relationship with them in the past.
“How you managed your finances in the past will have a big impact on your ability to get a loan in future,” says Mark. “If you have drawn up a personal budget and ensured that you can afford it, credit can be a great way to relieve financial pressure and start building an asset base for your future.”