Having a credit history is important for young people, although they are often advised not to live on debt and take responsibility.
However, if you don’t have a credit history, you won’t be able to get a home loan, auto financing, or even fund your college or get a job.
Young people are often told to live within their means, not to finance their lifestyle with debt and to avoid bad credit. While this is excellent advice, did you know that even if you don’t have a credit history, it can work against you?
“Many of us grew up believing that all credit is bad, but that’s not true. When used responsibly for things that increase your wealth and create value, credit can empower us to achieve our goals and live with confidence,” says Ayanda Ndimande, Head of Business Development at Sanlam Retail Credit.
She says “bad debt” refers to unnecessary debt that doesn’t increase your wealth over the long term, such as debt. For example, a retail account or taking out a personal loan to pay for a vacation. Student loans, home loans, and vehicle financing are examples of “good debt.” A personal loan can also be used forever, for example to finance renovations to increase the value of your home.
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Few people can buy a car or house with cash
Most South Africans need credit to buy a property or car and when you apply for a loan your creditworthiness will be checked.
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 sound you are.
Bad credit or no credit history may result in you not being eligible for a loan or being approved for less than you applied for. Bad credit is also likely to result in higher interest rates, which will cost you more in the long run.
Then how do you start your credit history? According to Ndimande, using a credit card responsibly is a good place to start for young professionals.
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“Due to high interest rates, it might sound counterintuitive to suggest building a credit history with a credit card, but if you commit to paying it back every month, this payment method gives you more flexibility than a retail clothing account or cell phone contract. “
She says using a credit card responsibly will also help you make larger credit purchases in the future, such as a family home. Ndimande recommends putting your own money on your credit card and only using what you have.
“This gives you the benefits of a credit card without going into debt or paying debt fees while improving your credit score.”
She suggests opening an account or credit card with a certain limit that you can afford. If the bank offers a higher limit, ask for a reduction to avoid the temptation. Use the account with caution and pay back on time.
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Good credit history around the behavior
“Remember that building good credit is about behavior over time, not a one-time exercise. Maintaining a healthy credit rating should be part of your financial planning. After all, at some point in your life, credit may be necessary to empower you to achieve your goals.”
She says managing your credit starts with knowing your creditworthiness. South Africans are entitled to a free credit report from TransUnion and other credit bureaus in South Africa every 12 months, or you can receive a free credit report as often as you like through the Sanlam Credit Solutions dashboard without it affecting your score.
“While you know your credit score is good, it’s even better to understand and improve it. Sanlam’s dashboard offers free access to a credit coach who can help you manage your credit more effectively to help you meet your goals be able.”