While some people have the misconception that credit is bad, the truth is that very few of us can live the lives we want without at least some credit. That credit could be a clothing account or personal loan, or it could be a home loan, vehicle finance agreement, credit card, or some other facility. To get some credit types, you first need to show that you can manage your credit correctly; and that means you need a good credit score.
According to Warren Tromp, Executive for Product Development at Nedbank, most responsible lenders, like banks and other finance providers, use credit scores as a factor when deciding to offer credit. They also use your credit score to work out your risk profile (the chances that you may not repay your credit), which impacts the interest rate they charge you.
“Your credit profile gives lenders a good idea of how well you have managed your credit in the past,” he explains, “so if your score is in the upper end (660 and above), you stand a better chance of getting the credit you’ve applied for at the lower end (590 or less) that shows you haven’t been managing your debts that well.”
According to Warren there are a few ways that consumers can make sure that they have a good credit (risk) profile, but the most important is to consistently pay all their monthly repayments on all bills and loans they have. “The quickest way to damage your credit score is by missing payments, paying late, or not paying the correct amount,” he explains, “every time you do that, the credit agencies will adjust your credit score downwards.”
A bad credit action can show on your credit history for months, or even years, making sure that you repay the correct amounts on time is crucial.
There are also other credit score damaging actions you should avoid, including:
§ Making a lot of credit applications at one time – banks take that to mean you’re in financial difficulty
§ Maxing out your available credit – try to only use up to 50% of any credit facility (credit card or overdraft) you have
§ Having judgement or administration order against your name – these can stay on your credit record for up to five years, so you need to avoid them
Just as there are negative credit actions to avoid, you can take positive actions to improve your score. Making all bill and loan payments on time every month is obvious, but others are too, “Make sure you only ever apply for credit from a registered financial services provider,” he says, “that way you are protected by the Consumer Protection Act. There’s no risk that an unscrupulous lender could do something that affects your credit score.”
Warren also recommends regularly checking your credit score. “Many people simply ignore their credit profiles until they need to put in a credit application,” he explains, “but since having a good credit score is an important part of good money management, it’s important to check your score regularly, so you can take corrective action if necessary. Thanks to Nedbank’s credit health tool on Nedbank’s website you can check your credit score for free every month, with no effect to your score even if you aren’t a Nedbank client.”
But what if you don’t have a credit history?
If you’re starting out in your adult life, you may not have any loans or regular bills yet, so you won’t have a credit profile. It can be tricky because you need a credit score to get many types of credit. For this reason, he recommends building a credit profile as soon as possible once you start working, and he says the best way to do that is by applying at your bank for a credit card or opening an account at a retail store.
“Many banks will give you a credit card with a small limit as long as you are a client and you can show that you have a steady income,” he explains, “then, once you have a credit facility, use it regularly (as opposed to cash) and always pay back at least the minimum repayment amount on time, every single month. Soon, you’ll have a credit profile and score, and you can start making use of other credit facilities to make good and responsible money choices and gradually create exactly the life you desire.”