By TKay Nthebe
Personal finance experts often talk about the difference between good and bad debt, because not all debt is bad right? How you manage your debt, however, can affect your finances and ruin your credit score.
Good debt is explained to be taking debt to acquire assets that can help you earn an income or improve your quality of life. For many Basotho, having access to debt can help them achieve their financial goals such as buying a home for their family, paying school fees, buying a car or starting a business (if managed properly).
Debt management, which includes paying your financial obligations on time and conducting your financial affairs properly is an important part of good personal financial management. Therefore, it is important to understand the principles of credit and why having a good credit record is crucial.
What is credit?
Credit is explained as the ability to borrow money from financial service providers like banks, micro-lenders, or from family and friends with the understanding that you will be able to it back (Akin, 2019). You can then use the money to access goods and services. The person or financial institution borrowing you money does so because they have confidence and trust that you will pay them on the agreed time, assuming you are “credit worthy.”
What is the credit score?
To determine whether you are credit-worthy or not, financial service providers will request a credit score and check your credit history before deciding to approve your loan application. This is a three-digit number derived from your credit report or credit history. This score informs financial services providers whether you are a good payer or a high-risk client. When your credit score is low, the likelihood of having your loan application approved is slim.
There are several factors that influence your credit score, whether positively or negatively which include but are not limited to your account conduct, the amount of debt you currently have and how you have previously paid your loans – are they paid on time or not? The number of years you have had credit and the mix of credit you have e.g. personal loan, car loan or credit card.
Why do you need a good credit score?
As a consumer of financial products and services, having a good credit score has some advantages, for example, you will have access to credit and be able to negotiate better interest rates on loans. In this high-interest rate environment, negotiating a low-interest rate on your loans can save you a lot of money on the interest paid. As you transact, take out new loans or revolve existing ones from credit lenders in Lesotho, your credit history is consolidated and submitted to Credit Bureau agencies such as Experian (Also known as Compuscan Lesotho), whichis registered and licensed with the Central Bank of Lesotho.
It is important to know that financial services providers will do a background check every time you apply for a loan. It is therefore important to conduct your account properly, manage your debt and avoid ruining your credit score. In the next few articles, I will unpack in detail how you can improve your credit score and the consequences of poor debt management. Likhomo!
