How to establish and build up your credit record

Meet Paul, a 23-year old graduate who has just landed his first job and is looking to buy his first car. It’s right about here that Paul hits the wall because as a recent graduate, and even as a gainfully employed person, he has no history of managing credit, and therefore has no credit score.

Credit providers will typically use your credit score to determine what kind of lender you are and the level of risk you present in terms of repaying a loan or credit – which is why maintaining a good credit score – once you have one – is so vital. Your credit score is based on how well you manage your debt and how responsible you are when it comes to repayments, including whether you consistently pay on time and pay at least the minimum instalment due. If you have a non-existent credit score, it’s likely that a lender will decline your application for a loan/credit as they have no track record to base their risk assessment on as to whether you are a good payer or not.

How do I establish and build up my credit score?

According to Gareth Levinsohn, Chief Commercial Officer of Shapiro Shaik Defries and Associates (SSDA), it takes around 12-18 months to build up a meaningful credit record, and you’ll need some sort of retail, cellular or store credit account – either interest or non-interest bearing – to set this process in motion.

“As a rule of thumb, get started with a very manageable, interest-free credit facility that you can easily afford, and instead of paying cash, purchase something using this facility. Make sure that you make all your instalment repayments on time, every month and pay the minimum required amount or more each time. A cell phone contract or retail store account are good options. The proviso is that you must be able to afford the repayments and that you pay consistently – the objective is to demonstrate your maturity and responsibility when it comes to managing your credit,” explains Levinsohn.

Why is it important to build up your credit score?

“As much as you hear the adage that ‘cash is king’ – and which is a good motto to follow for consumption-type purchases – there are many big-ticket items that very few people can afford to buy on a cash basis – think property, car, large appliances, tertiary education and so on. Most people will need a credit facility to be able to afford these purchases, especially when you consider that a house will take you around 20 years to pay off and a car around 5 years or more. Your credit score and past credit behaviour plays a fundamental role in being able to qualify for such loans and will also define the terms and interest rates you qualify for – obviously the better your credit score, which means a lower risk profile to the lender, the better the terms and interest rates you can expect to receive,” explains Levinsohn.

What’s a good credit score?

Credit scores are typically rated on a scale from 0-1000 as follows:

  • 767 – 999: Excellent
  • 681 – 766: Good
  • 614 – 680: Favourable
  • 583 – 613: Average
  • 527 – 582: Below average
  • 487 – 526: Unfavourable
  • 0 – 486: Poor

Your credit score is calculated by a credit bureau using all the details on your credit profile, with your score reflecting a summary of all your financial decisions and behaviours as you start transacting with various banks, credit providers, retailers and so on.

What factors influence your credit score?

  • Missing or late payments will negatively affect your credit score. Even if you double up on the instalments in the following month to catch up, the inconsistent payments will reflect. The same applies to ‘adverse legal information’ – although this information is cleared as soon as the account is settled, the negative repayment history stays on your profile for a number of years.
  • Multiple credit enquiries and high credit utilisation – a sudden uptick in credit applications in a short period will red flag on your credit profile, as will a consistently high credit limit utilisation. Try and keep your usage to less than 50% and ideally at 35% of your credit limit. Balances that are always close to your limit suggests that you are living on credit to get by. Any credit enquiries will reflect for up to two years.
  • If you have a number of unused credit facilities, consider closing some of them. Having a lot of unused credit could lead to a large debt balance if you decide to use all of them at once.
  • A court judgment or ‘blacklisting’ will negatively impact your score.
  • Duration of credit history – it takes six years to calculate your credit score, so a credit history shorter than this will bring your score down. By the same token, it means that any missed or late payments history will stick around for six years too!
  • If you run into payment difficulties, be proactive and make arrangements with the credit provider. We may be living in challenging pandemic times, however the fact remains that your debt is not going to go away. Rather proactively approach and negotiate with creditors and lenders. If contacted by a collection’s agent, explain your situation so they can work with you to find a solution or make alternative payment arrangements where appropriate. But don’t ignore the calls. A lack of any response from you will simply see it role into the legal stage and this becomes imminently more challenging and negatively impacts your credit rating and future personal financial health. If you’re in a genuine bind, consider a debt consolidation process where professionals can help and negotiate on your behalf and ensure that you rehabilitate yourself and avoid a legal process.
  • Regularly check your credit report via the various bureaus which provide a free annual credit report to consumers. Check that all details are indeed correct – many instances of identity theft and fraud are detected this way and can have a severe impact on your credit score and financial health if undetected. If your identity or passport documents are lost or stolen, report this to the SA Fraud Prevention Services which will enter your details on its database to inform its members that your identity has been compromised and that they should take additional care when confirming your identity, including credit providers.
  • Improvements in your credit score will usually start showing within three months of consistent behaviour and your score should updated accordingly. However, there’s really no fixed time frame for this and it is usually driven by the time it takes for you to reflect disciplined credit habits and to reduce your debt burden and utilisation to healthier levels.
  • Serious credit impairments such as late payments, default judgements, insolvency and legal action can stay on your credit record for up to 10 years.

“Considering the importance of your positive credit score to your current and future financial security and wellbeing, there’s every reason to practice healthier credit behaviour and management from opening your very first account, and treating your credit score like the gold that it is,” concludes Levinsohn.

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