The concept of taking out credit has been given a hard time in recent years - following the sub prime mortgage crisis in the US and rising levels of indebtedness in South Africa.

However, according to Kay Geldenhuys, property finance processing manager at ooba, if it is used in a constructive way, credit can prove to be a vital tool in building wealth creation for the future.

“There are various ways consumers can use credit to their own advantage. 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’s capital value appreciates.

“The obvious type of good credit is buying a property either as a main residence or as an investment property and financing the purchase through a homeloan. With the property market now showing clear signs of recovery and prices continuing to rise, it is still one of the best investments.”

She advises anyone who is buying 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 banks, and if necessary shop around with other lenders, to secure the cheapest credit and maximise their investments. However, you must understand that property is a long-term investment not a ‘get-rich-quick’ scheme and you must be willing to hold onto your property through the dips and troughs such as we have experienced in the last few years,” says Geldenhuys.

“Most consumers are surprised to learn that credit cards can also be a source of good credit if they are used wisely. Your credit card allows you to earn interest in your current account while you use the bank’s money to finance your purchases during the month. But 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.”

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.

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 purchases that lose value like a car or clothing that make you poorer.

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. Homeloan rates are much cheaper than the finance rates for retail or instalment sale accounts.

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

Finally, she also suggests paying higher instalments on your credit facilities than the minimum required by the banks 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 R118 576 in interest over the loan period, assuming that your interest rate is 10%. This means you will save more than five times the original amount as well as cutting your repayments to 18.8 years on a 20 year bond.