In these harsh economic times, it is imperative that we inform ourselves on how to obtain a solid grip on our finances. One way to do this is through working towards a favourable Credit Score. Below, Zimasa discusses how you can improve your credit rating and use it to your advantage…
I remember the day I proudly pranced over to my Banker’s cubicle to apply for a Credit Card vividly. “Why not?”, I thought – I had been working for a blue chip institution for close to a year, had stabilized financially (well, somewhat) and felt I was ready to take on the responsibility of lending credit from a financial institution on a frequent basis.
My dreams were soon destroyed as my Banker, with grave concern, enquired whether I had any retail accounts, any personal loans against my name and whether I paid anything I purchased through credit. As I answered all the above in the negative, I was immediately declined of that shiny square piece of plastic. It made absolutely no sense to me: I paid all my clothes and furniture cash, had no retail accounts (and therefore, was not in arrears on anything) and transferred funds directly from my cheque account. In my mind, I was the perfect candidate for a credit card and clearly held my finances down pretty well.
It turned out that, that’s where I was wrong. You see, credit and debt can actually be a good thing if carefully managed – and can technically make you wealthier. Credit and Financial Institutions want to see you make effective use of credit as a means of gleaning whether you are a good payer, and deserving of being granted certain wealth and credit instruments.
The effective use of credit is linked to your Credit Score – a numerical figure every individual possesses which is based on a level analysis of a person’s credit files. The credit score represents the creditworthiness of that person and is primarily based on credit report information typically sourced from credit bureaus. Simply put, a credit score is a figure that determines how credible you are in terms of repaying your home loan, vehicle finance and retail accounts. A great credit score means that Banks and Financial Institutions will grant you mortgages, cellular accounts, vehicle finance and many other credit instruments with greater ease, because they are assured (based on that very score) that you will repay what you owe.
A credit scoring of between 0 to 5 will usually result in applications for cellphone contracts, car and home purchases and other loans being declined. Because it is important to have these instruments under your name for your own convenience and for facilitating your wealth, aiming for a credit scoring between 6 to 10 will work in your favour. As per my Banker’s recommendation, as a woman in her 20’s, I had to work towards obtaining credit scoring of between 7 and 8.
It was last year, November 2013 when I applied for my credit card and I am happy to say that after going back to my Banker this past July 2014, I was granted that shiny piece of plastic (I asked for a minimal limit of R5000 to begin with for the next 6 months, in order to stabilize and learn to use it wisely).
It stands to reason, that my score is currently above 5 and here are a few tips which I received from my Banker and made use of:
1) Know your status!
Check your credit records at all credit bureaus and visit a Banker at your nearest branch to ascertain what you are currently sitting on. South Africans are entitled to one free report per year after which additional reports can be attained at a small fee. Set aside 30 minutes one morning to sit with a Banker and discuss your scoring.
2) Apply for at least one Retail account.
…And use it wisely! I knew that if I applied for a clothing retail account, I would spend it to oblivion, thus I decided on embarking on an account with @Home since I was in the process of completing the décor in my apartment. I now use my account to purchase essentials such as bath towels, hand towels, diffusers, mats and ornaments. I have given myself a limit of R600 to spend on the account and pay the account off monthly.
I was also told to always pay my account off days before it becomes due and do my best to pay off more than what I owe on my monthly repayment. This ensures you have a great payment trail – huge bonus!
3) Never max out!
Once granted a credit card or overdraft facility never ever max it out ie – spend the maximum amount which you have been granted or more. This has severe implications for your scoring and decreases your scoring significantly. Thus, for example, if you have an overdraft facility of R2000, endeavor to make use of only R1500. And if you have a limit of R5000 on your credit card, make use of only R4500 or less.
4) Don’t use it? Lose it!
Reassess your monthly spend and reduce your credit limits accordingly. If you notice that you are spending on items which you can cut down on, do so and close any retail accounts you no longer make use of.
5) Are you stable?
A credit provider will consider how long you have worked at your current job and how often you move residences as part of the credit rating process. It is used as an indication of your stability, trustworthiness and risk profile in the event that debt has to be collected from you. I have remained in my current apartment for two years now and have never missed a single repayment, which I have been told contributed towards the increase of my scoring.
6) Keep it clean & in your name
If you have paid your debt off in a timely fashion over a number of years, you can work towards a credit rating that could afford you a more favourable interest rate. Therefore, ensure that all your bills and debts are in your name so that you can benefit from a positive credit rating. It is important to note that repaying someone in a personal capacity will in no way contribute to your credit record.
7) Pay more than the monthly minimum
When you receive your credit card statement, a monthly minimum and due date are indicated. If you regularly only pay the minimum and make little impression on the total owed, your card company may see this as a sign of distress and may reduce your access to future credit.
8) Keep a record
With every repayment try and pay a bit extra and keep a record of all slips and documentation after paying your instalments. When paying large amounts of debt in full, ask the credit provider for written documentation indicating the details of your debt term and date on which the amount has been paid.
If you need assistance in getting on track with your finances or if you find it difficult to meet your payments, contact your bank to discuss possible debt relief options. Your bank is there to assist and will be happy to put a solution in place. Recent developments have shown that an alarming number of people who are in debt in South Africa are aged between 24 and 35 years of age! It’s our duty to improve these statistics and raise our scores.
Founding Editor: The Corporate Canvas
Credentials: Bachelor or Laws, University of Witwatersrand; Master of Laws (Corporate Law) University of Johannesburg