Rene Moonsamy, chairperson of the National Debt Counselling Association (NDCA), explains how understanding good and bad credit could help under-pressure consumers avoid a debt spiral.

With the rising cost of living, the consequences for people with little or no financial wiggle room are apparent, with applications for debt counselling in April already significantly up compared to last year.

“Many consumers have few options: dip into retirement savings via the ‘two pot’ system, take more credit or take debt counselling.

“Basically, we are going to see people borrowing more. So, with April being Financial Literacy Month, it’s the perfect time to explore the distinction between so-called good and bad credit.”

Credit itself is neutral, she explained.

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“So it is not the type of credit that’s at issue. What makes it good or bad is what it is used for, how much it costs and whether the consumer can afford it.

“Good credit is affordable, well-managed and used for productive purposes that improve your long-term financial stability, like a car to get to work, education or renovations to add value.

“Payments should fit your income, and interest rates should match your risk profile. Paying on time builds a positive financial record, helping you access better rates later.

“Lenders are required by the National Credit Act to make sure applicants can afford credit before approving it, while consumers must be truthful about their income and expenses.”

Moonsamy said bad credit starts when desperate people lie about finances on loan applications, even after affordability checks.

Examples of this are using credit for lifestyle costs or living expenses, or paying off old debts with new loans.

“There’s nothing inherently wrong with credit. It’s integral to a functioning economy.

“What’s important to understand is whether it benefits you or not.

“We understand, however, that for people already caught in a debt spiral, the distinction between ‘good’ and ‘bad credit’ is academic, in which case the best course of action is to get help.

“Delaying can further negatively affect your credit score and put your assets at risk of repossession.

“And, if you wait too long, debt counselling may no longer be an option.

“Credit is not bad, but people in a debt spiral should get help from a debt counsellor immediately before it is too late.”

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