Credit as a Tool versus a Trap
For too many South Africans, credit has shifted from being a tool of opportunity to a survival mechanism, with millions of people taking out credit or taking on loans just to manage day-to-day living costs rather than to invest or grow wealth. The reasons are not hard to find.
Consumers have been contending with a constant onslaught of escalating fuel prices, skyrocketing food prices, unnecessarily high interest rates and constant electricity and water tariff hikes for the past few years, with millions turning to their store and credit cards to make it through each month. The National Financial Ombud Scheme says that the number of consumers with impaired debt has increased from 9.9 million in 2022 to 10.5 million in 2025, and that a third of South African borrowers have impaired debt. This means that they have either missed three or more debt payments, have an adverse listing on their credit report, and/or face legal action — indicating rising financial stress among borrowers.
To ensure that you don’t become a part of these statistics, you need to keep a tight hold on your credit and educate yourself on the difference between good and bad credit. “It is critical to understand the difference,” says CEO of Debt Rescue, Neil Roets. “Good credit acts as a tool for building wealth and financial stability, while bad credit often leads to a cycle of debt, high interest rates, and financial distress,” he explains.
Good Credit versus Bad Credit
Aside from funding your big assets, access to credit can be a lifesaver in times of emergencies, like an unexpected home move or a trip to visit an ill relative or friend. Credit can be a strategic tool for investing in income-generating assets, such as a fast-food caravan or a truck for your side-hustle. The trick here is to have a solid pay-back plan and to stick to it.
No matter how dire your situation is, using credit to buy things like groceries, a lavish new wardrobe or tickets to a concert is a clear financial warning sign, as those costs should rather come out of your monthly budget or be allocated to a fund that covers “nice-to-haves”.
Your credit rating and make sure you understand the full cost, including ancillary fees — those additional, non-base charges incurred for services or products that support a primary purchase or transaction — rather than focusing only on monthly instalments.
A positive credit rating is one of those things that will stand you in good stead in life, even though you may not give it much thought as you go about your daily living. Whenever you need to apply for vehicle finance, a home or business loan, or even a new cell phone contract, this is what your prospective creditor will evaluate you on.
“Many people believe that it’s better to save money — no matter how long it takes — to avoid getting into debt, which, in principle, of course is an admirable financial situation to strive for,” says Roets. “The downside though is that, with no credit history, there’s nothing to show that you’re a responsible borrower who can manage balances and payments. It is a good idea to maintain at least one active account, like a phone or clothing account, that you manage well — paying in full and on time every month,” he advises.
Responsibly managed credit, where repayments are made on time and debt levels are kept manageable, can build or improve a credit score, making it easier to qualify for future borrowing. Conversely, late payments, missed instalments, or high debt exposure will damage your credit score and reduce your access to future credit.
Staying in the know
There are a number of things you can do to manage the cost of borrowing. For example, you can shop around for credit with competitive interest rates and make sure you understand the full cost, including ancillary fees.
Keeping a watchful eye on any regulatory changes or reforms in the credit space is another smart way you can manage your credit. Recently, the South African Reserve Bank (SARB) signaled possible reforms to credit pricing by proposing to phase out the traditional prime lending rate in favour of a more transparent policy benchmark. This will potentially make loan pricing easier to understand for consumers.
Regardless of benchmarks like these, interest rates on unsecured credit such as personal loans and credit cards can be high. High interest, fees, and the compounding cost of late payments will increase the overall cost of borrowing significantly. Understanding how this works is your first step towards savvy borrowing.
“This will go a long way towards ensuring that taking on credit benefits you rather than working to your detriment. With a dose of discipline, and an ear to the ground, you can make credit work for you and build a financially secure and solid future,” concludes Roets.