4 Ways to leverage credit to build wealth

Article summary

• Property investment is a prime example of effective wealth creation via credit, as the property will highly likely appreciate in value as the owner pays it off with monthly repayments to the lender.
• Other effective lines of credit include credit cards and capital investment on credit.
• A good credit record is vital for effective wealth creation, as it increases your chances of getting loans, and leads to more favourable interest rates.

The concept of taking out credit has gotten a bad rap in recent years with the rising level of South Africans who are over-indebted.

However, according to Kay Geldenhuys, Head of Sales Fulfilment at ooba Home Loans, South Africa’s leading home loan comparison service, if credit is used in a constructive way, it can prove to be a vital tool in building wealth creation for the future.

Using credit to build wealth

Here, Geldenhuys discusses the various ways in which consumers can use credit to their financial advantage.

1. Property

Property is a prime example of using good credit for wealth creation, as property owners use the bank’s money to finance their purchase, paying off a small portion each month while the property appreciates in capital value.

With South African interest rates currently at 10.5%, their lowest rate in five decades, now is the best time to invest in property, which is already considered the most solid investment you can make.

With the supply of luxury housing outstripping demand, this puts buyers in the strong negotiating position (known as a buyers’ market), further enhancing the appeal of property investment.

Geldenhuys advises anyone who is purchasing property for investment purposes to make sure that the property is in an area where there will be sustainable capital growth and where there is a demand for rental properties.

“Potential homebuyers should also negotiate the best rate concession from their bank, and if necessary shop around with other lenders in order to secure the cheapest credit and maximise their investment.” ooba Home Loans, South Africa’s largest home loan comparison service, can make this process easier by submitting your home loan application to multiple banks, allowing you to compare offers and find the one with the best deal.

“However, you must understand that property is a long-term investment not a ‘get-rich-quick’ scheme. You must be willing to hold onto your property through the dips and troughs such as we have experienced in the last few years,” warns Geldenhuys.

2. Credit cards

“Most consumers are surprised to learn that credit cards can also be a source of good credit if they are used wisely,” says Geldenhuys. “Your credit card allows you to earn interest in your current account whilst you use the bank’s money to finance your purchases during the month.” However, she cautions that this will only work if you are disciplined and repay the full outstanding balance at the end of the month to avoid paying interest on your credit card.

3. Capital acquisition

Another type of ‘good’ credit would be any other capital acquisition that requires finance from a bank and that you can derive an income from, says Geldenhuys.

A capital acquisition could be an investment in machinery or equipment or, of course, investment in property that is income generating. “Credit for these sorts of assets makes you wealthier, it is only credit borrowed from the bank for luxury purchases like a car or clothing that make you poorer.”

4. Debt consolidation

Debt consolidation is another example of good credit. Consumers can use the access facility on a home loan to settle their various retail and instalment sale accounts. “Your home loan rate will be much cheaper than the finance rates of your retail or instalment sale accounts.” But, bear in mind, you will be financing these consolidated accounts over the lifetime of the home loan, which is likely longer than the term you may have chosen to finance them over initially.

Geldenhuys warns that if consumers use their home loan to settle outstanding debts and store cards, they must be determined to not use these cards again, particularly if they are still paying off the previous debt.

Finally, she also suggests paying a higher instalment on your credit facility than the minimum required by the bank to ensure that you attain your wealth creation goal as quickly as possible.

For example; a R20 000 lump sum deposited into a million rand bond will save you R58 646 in interest over the loan period, assuming that your interest rate is 7%. This means you cut your repayments to 19.15 years on a 20-year bond.

The importance of a good credit record

A good credit score (anything over 620) will increase your chances of acquiring loans, such as a home loan, and will earn you more favourable interest rates. Ways to improve your credit record include paying outstanding bills, paying incoming bills on time, and paying more than just the minimum installment on your bills.

Property investment made easier

If you choose to take advantage of low interest rates and invest in property, bear in mind that ooba Home Loans, South Africa’s leading home loan comparison service, offers a range of tools that can make the home buying process easier. Start with their Bond Calculator, then use the ooba Home Loans Bond Indicator to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.