Let credit work for you - Don’t let yourself work for credit | Sunday Observer

Let credit work for you - Don’t let yourself work for credit

Using credit (loans, leases, and credit cards) is an art blended with skills. My perception is that it should be taught to children at a very young age. Parents can be their first teachers.

Initially, it is all about financial discipline and its management. Second, going beyond your means wisely by using credit for the betterment of your future.

Using credit is not complicated if you know your basics. Nevertheless, you should use this tool carefully and wisely. If not the consequences can be harmful. You would have heard the narratives as to how our kattadiyas got work done through evil forces in the past. Similarly, you can ‘work wonders’ with credit if you use it wisely.

Having a good credit record means that you pay your dues on time. Having a good financial record means you don’t overspend, keep an eye on your spending all the time, and in general handle your money with a sense of responsibility.

When you feel your financial life is well-controlled, that perception will give you some sense of relief and power to say that you are able to handle anything life throws at you. Though Sri Lanka is still not geared to assign you with a credit score for your credit dealings, it should take place at some point in the near future.

When it is implemented, your present credit dealings which have been recorded at the Credit Information Bureau of Sri Lanka (CRIB) will surely be used. Hence, start now to build a good credit score which will be very useful in the future.

Consumers with excellent credit scores have access to better credit rewards in the credit Market.

Why do I need credit? Ask yourself this question before a credit facility is obtained. Don’t go by eye-catching advertisements alone or just because someone is pushing you to obtain a loan, lease or a credit card.

Justify your requirement yourself. Your requirement of credit can be categorised into four segments: emergency, essential, productive and consumption purposes. You may need money for an ‘emergency’ - such as a sickness or an accident to you or your family members, the financial impact to you as a result of a natural disaster in the area, or a funeral in the family.

The ‘essential’ is to buy a vehicle, build or renovate the house, buy a plot of land to build your home. The ‘productive’ credit is obtained to enhance your income by starting a new business venture and buying a vehicle for renting purposes.

The ‘consumption’ credit is the credit you spend on food, travelling and entertainment.

Emergency

You can’t avoid credit in an emergency as all of us face uncertainties at some point or other in our lives. To avoid such situations, the only advice that could be given is to build a fund buffer which is known as an ‘emergency fund’, over a period of time, or to obtain a dedicated insurance cover for such emergencies.

In the absence of such a fund, dedicated insurance cover or a generous friend or a relative, you will have to go to a Financial Institution to obtain a loan. Don’t panic and borrow from the local market at rates as high as 60-120% per annum while sacrificing your valuable property deeds.

Don’t get trapped in the loan shark’s net. Go to a ‘Central Bank registered’ financial Institution. A gold loan which can be obtained against your jewellery is the best option for obtaining quick cash.

If you have an unencumbered vehicle ( i.e- free of finance/lease), you can obtain an overdraft facility by pledging the Certificate of Registration (CR book – Vehicle’s book) with a finance company.

Depending on the time, do a quick comparison among a few companies before the loan is obtained. The amount you have to pay monthly, initial charges, fall back options (if you are unable to settle the loan on time), and concessions that can be enjoyed in case of an early settlement, are a few points that you can compare.

Essentials

You have to maintain certain standards in your life to match your surroundings, the society which you live in, and to meet your day-to-day needs. An essential for you may not be an essential for another, and vice-versa - the definition of ‘essential’ differs from person to person. Whatever your priority is, all of us have essentials of our own. Once the essentials are fulfilled, we move into luxuries. Unlike in emergency credit, here, you have time to plan.

Start in a small way. Do a calculation and figure out how much money can be kept aside monthly after spending. Save that portion of money at least, for 5-6 months until you get used to living without it. Place it in a savings account monthly and maintain a record.

This record will be useful to your Credit Manager at a future date when he evaluates your credit history. It will give good essence for him to prepare a good credit appraisal on your behalf. A part of the saved money can be used to meet the initial fees on your prospective loan.

Depending on the circumstances, when buying a vehicle for your family, consider the following aspects as well. In addition to the rental which you have to pay, there are other expenses that you have to bear when a vehicle is purchased such as insurance premiums, revenue licence fee, wear and tare expenses and periodic service expenses.

Take a stock of these expenses for a year, divide it by twelve months and get an idea of your average monthly additional expenditure. If you don’t do this calculation, halfway through the contract you will face cash liquidity issue.

It is advisable to save this money in a separate savings account on a monthly basis to use as and when circumstances demand. You may think this is cumbersome, but then again, this is how you should learn to deal with credit. If not, you will have to face other consequences.

Pay your monthly rental and keep aside the other expense of your vehicle, before spending on anything out of your salary. You can apply this example to other borrowings as well.

Productive purposes

As far as the growth of the country’s economy is concerned, this is the best loan segment. Unlike in essential loan segments, this segment doesn’t have dead- ducks which don’t contribute back to the ongoing economic growth of the country.

The car purchase through a lease may be just lying at home. It doesn’t generate an income for you and doesn’t contribute significantly to the economic growth of the country during its life span. But a lease or a loan used to buy a commercial vehicle such as a truck, van or a bus will give you an additional income. Those vehicles don’t stay idling at your portico, as cars do.

But, loans taken to build commercial buildings, generate revenue. This is the revenue spinning segment of credit. Yet, many aspects have to be considered before you get into this loan segment, such as your experience in the particular field, competitors, fallback options if the business fails, management substitutions, Government policies and likely future trends.

These are a few aspects which you should consider before getting into this loan segment which is rewarding but tricky. Let us discuss this aspect in a comprehensive way in a future article in this series.

Consumption purposes

This is the most complicated loan segment, which customers misunderstand. Also, this is one of the main factors that influences the present growth of the banking industry. Mainly, Credit cards and personal loans contribute to this loan segment. Credit cards have many advantages and disadvantages.

Don’t use it as though you have been granted a generous credit limit by the bank. Credit always comes in as a package, along with its fee structure. Hence, be mindful of it.

Some people have formed their own credit card groups for their mutual benefit. Also, make it a practice to follow special offers sent to you by banks. Some use the credit card instead of cash and save cash in their Savings Account.

By doing this, they enjoy the interest during the grace period and on the due date, they settle the credit card by using the saved money. The earned interest is their clean profit. If you have reliable information of a price hike in the near future (the Budget is around the corner), use your credit card and do the purchases. Pay on the due date and enjoy the increase in the price hike as your profit. Make it a practice to redeem accumulated points at regular intervals.

While punctual loan repayments open more options for loan qualification, it also lets you borrow money at lower interest rates. The greater your credit record, the better your interest rates will be on everything from mortgages to credit cards to vehicle loans.

The banks and non-banking Financial institutes will be right behind you to accommodate you on their loan portfolios with any form of credit. You will be on a better footing to negotiate. When it comes to credit, even a single percentage point shaved off your interest rate could save you a substantial amount of money over the life span of the loan.

Considering the inflation rate of goods and services in the country, if you use credit wisely, you will realise that, most of the time, credit is cheaper than cash, as money you use today has a greater value than the same amount of money you use in another 2-3 years’ time.

- The writer is a former CEO of a non-banking financial institution. 

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