After a lifetime of being told never to go into debt, it is jarring to realise that the practice of taking out loans and buying items on credit is not only encouraged, but also an essential part of “adulting”.
When you first start earning a regular income, it might be the last thing on your mind to worry about your credit score, but in the long run, it will save you money, time and stress.
Tumelo Ramugondo, Standard Bank’s head of credit cards, goes as far as to say that one’s “life dreams are mostly dependent on having access to credit”.
He’s not wrong – a good credit score is vital in several aspects of life. You can’t apply for a loan, buy a car, rent an apartment, apply for insurance, or in some cases even buy a cellphone without a decent credit score.
The point of a credit score is to rate how trustworthy you are when it comes to money. Banks and businesses use it to gauge how risky you are as a borrower, or as someone locked into any sort of contract.
An excellent credit score sits at about 800 points, but anything in the 650-799 range is great too. A score of 600 is considered average, and a score of 500 or below is dire and will likely turn most lenders away.
(Fear not if your credit score is sitting at an alarming -1. It just means you haven’t incurred any debt yet.)
Where to start?
Credit agencies like TransUnion and Experian collect the data to create your score, and you can check how you’re doing directly with them or through various other apps. But for newbies to the world of credit, the ClearScore app is free, straightforward and tracks your progress.
So, to get scored, you need to attain credit. However, the catch is that banks often will not issue a credit card to you until you have a decent credit score. So, where do you begin?
In South Africa, most people start with store cards. They may seem old-fashioned, but they’re a solid and easy way to build a credit score. Think stores like Truworths, Foschini, Sportscene or Woolworths.
These cards can have eye-watering interest rates, but most offer about six months of interest-free credit, which is when you want to pay off most of your transactions.
Monthly card fees can range from R15 to R50, so be sure to double-check this before signing up. There is also usually a once-off “initiation fee” – often hidden in sneaky fine print.
Always pay on time
Once you are signed up, make small purchases on credit and pay them off in full as soon as possible. We’re talking teensy tiny: a T-shirt, a couple of coffees or a day’s worth of groceries. As a rule of thumb, do not use more than 30% of the credit they give you.
These constant purchases and repayments will reflect your financial reliability, and in three or four months, your credit score will shoot up.
Basani Maluleke, Capitec’s retail bank executive, says it is a matter of patience and consistency. “Pay on time, every time. That is the single most important factor,” she says.
Ramugondo doubles down on the importance of paying on time: “If you miss a payment, even if you catch up next month, it [will] impact your credit record.”
Other golden rules include paying at least the minimum amount due, keeping your balance below the credit limit, and not applying for credit too often (banks will see you as “credit hungry”).
Begin with one
The length of your credit history matters, too. Start with one credit product, manage it well for a few months, and then close it before racking up interest. If your score still isn’t what it should be in that time, rinse and repeat the process.
Once you have a stable, decent credit score, banks should begin to offer you credit cards. That shiny piece of plastic might burn a hole in your pocket, but (unfortunately) it is best to be responsible with it.
And, in fact, most young, first-time workers are: Standard Bank reports that young people are actually more consistent with their repayments than any other age group.
“They are paying back almost three times per month on their credit card,” Ramugondo says. He explains that their statistics show younger people are making smaller purchases with frequent repayments to avoid interest, but still receive the discount perks of a credit card purchase.
Overall, the idea is not to be afraid of credit. Maluleke acknowledges that “high annual fees, complex interest calculations, and hidden costs have made many credit cards unaffordable for the general public”.
However, these days, many South African banks offer low-limit, short-term repayment credit cards as a way for people to learn about credit in a safe, affordable and non-life-ruining manner. Once you feel confident enough to handle credit, it can open many doors for you.
Top image: Rawpixel / Currency collage.
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