How to start your credit history, improve your score
It is important for young people to have a credit history, although they are often advised that they should not live on debt and be responsible. However, if you have no credit history, you cannot get a home loan or car financing or even fund your studies or get a job.
Young people are often told to live within their means, not to fund their lifestyle with debt and avoid bad credit. While this is excellent advice, did you know that having no credit history can also count against you?
“Many of us were brought up believing that all credit is bad, but that is not true. When used responsibly for things that increase your net worth and generate value, credit can empower us to realise our goals,” says Ayanda Ndimande, head of business development at Sanlam Retail Credit.
She says “bad debt” refers to unnecessary debt that does not increase your wealth in the longterm, such as a retail store account or taking out a personal loan to pay for a holiday. Student loans, home loans and vehicle finance are examples of “good debt”. A personal loan could also be used for good, for example, to fund renovations to increase your home’s value.
Most South Africans need credit to buy a property or a car and when you apply for credit, your credit score will be scrutinised. Your credit score is a rating based on the number of credit accounts you have, your payment history and other factors that tell lenders how financially dependable you are.
A poor credit score or having no credit history could result in you not qualifying for a loan or being approved for less than you applied for. A poor credit score is also likely to result in higher interest rates, costing you more in the long term.
How do you then start your credit history? Ndimande says the responsible use of a credit card is a good way to start for young professionals. “It might sound counterintuitive to suggest building a credit history using a credit card due to the high interest rates, but if you commit to paying it off every month, this payment method gives you more flexibility than a retail clothing account or a cellphone contract.”
She says responsible use of a credit card will also put you in good standing with your bank for bigger credit purchases in the future, such as applying for a home loan or car finance. Ndimande recommends depositing your own money into your credit card and using only what is there.
“This will give you the benefits of a credit card without having to go into debt or paying debt fees, while it will improve your credit score.” She suggests opening an account or a credit card with a specific limit that you can afford.
“Remember that building a good credit score is about behaviour over time, not a once-off exercise. Maintaining a healthy credit score should form part of your financial planning.”
She says managing your credit starts with knowing your credit score. South Africans are entitled to a free credit report every 12 months from TransUnion and other credit bureaus in South Africa or you can get a free credit report via the Sanlam Credit Solutions dashboard as often as you like without affecting your score.
“While knowing your credit status is good, understanding it and improving it is even better. Sanlam’s dashboard provides free access to a credit coach who can help you manage your credit so that you can achieve your goals.”