Give credit where credit is due: Advantages of good credit

July 17, 2023

Author

FinMeUp

Credit mini-series part 2

Your credit score is used by lenders as a prediction of how likely you are to fulfil your debt obligations. A high score means you're very likely to repay a loan, whilst a low score indicates that you're likely to default. Why does it matter? Two main reasons:

Credit approval

Not having access to credit will make your life extremely frustrating. Want to buy a cell phone? Youll have to pay in cash. Want to buy a car? Youll have to pay in cash. Want to buy a house? Youll have to pay in cash. Of course, very few people have money to even buy a new phone with cash. Having access to credit will set you free from these limitations and allow you to accelerate your lifestyle.

Having an excellent credit score doesnt guarantee approval because lenders still consider other factors such as your income and current levels of debt. However, a good credit score increases your chances significantly.

Lower interest rates

In addition to having higher credit approval rates, people with good credit scores are often offered lower interest rates. If you do manage to acquire credit with a bad credit score, youll be charged a rate well above the market norm (also known as the prime lending rate). In other words, credit will be very expensive for you.

Paying less interest on your debt can save you a lot of money over time, which is why building your credit score is one of the smartest financial moves you can make. Small differences in the interest rates might not seem like a big deal at first, but over time, even a 1% swing can make a massive difference.

For example, a 30-year fixed mortgage of R500 000 at 7.5% will cost a borrower a total of R1 258 658 (of which interest is R758 658) over the lifetime of the loan. If that same borrower pays interest at 8.5% just one percentage point higher she will pay R1 384 777 (of which interest is R884 777) over the life of the loan. This 1% difference on a mere R500 000 bond will result in additional interest payments of R126 119.