As a recent graduate, a part of you may feel ready to take the world by storm but at the mention of a credit score, your confidence falters. This is because you may not have substantial knowledge around credit scores or you may recall it’s always been linked to having debt, which has been labelled as bad and something you should avoid. On the contrary, having a healthy credit report is vital for when you enter the “real world”.
A good credit score rating can help you immeasurably to reach life’s milestones such as buying your first car, starting a business, renting a flat, buying a home or renovating your family home. Without a credit record, you will struggle to find the financial assistance needed to achieve those goals.
To help you, we’ve compiled a guide for what you can do to build your credit profile.
Understand how credit works
Before you begin your credit building process, you need to fully understand how it works. Credit isn’t taught as a school subject so most graduates leave without knowing how credit works or how it can be used to their advantage. Essentially credit is borrowing money from a financial institution. You and the lender have an agreement that you will repay the agreed amount and the interest monthly. When applying for credit, you have two options; secured or unsecured credit. Secured credit is money you're borrowing against an asset or collateral, like your home or car. Should you be unable to pay the debt, your home or car will be repossessed to settle the outstanding balance. On the other hand, unsecured credit includes credit cards, store account cards, and personal loans that don't have collateral. To qualify these, you'll need a credit score: a three-digit number that helps lenders determine the type of payer you will be. A good credit history shows your trustworthiness, allowing you to receive favourable interest rates and payment terms.
Now that you understand how credit works, let’s get into how you can grow your credit score.
1. Start small
To start growing your credit, you need to either open up a store account or a credit card. Since you are new to this and might be hesitant to acquire debt, it is advisable to have a small credit limit. Having a small credit limit and only using a small amount of it each month will ensure you can pay it back comfortably, which is beneficial to improving your credit score over time. Once you begin to get comfortable with credit, you can ask for a credit limit increase.
2. Pay on time
Your payment history is one of the most important things on your credit report. This shows lenders how you honour a financial agreement. When you don’t stick to the agreement, it is recorded on your credit report and will hurt your credit score, marking you as a high-risk borrower. On the other hand, paying your bills on time every month helps you avoid late fees, increased interest charges or going into debt collection, all of which negatively impact your credit score. Setting up a system to help remind you pay your bills can go a long way to growing your credit score over time. This could be through debit orders or creating a monthly budget and making EFT payments every month. You can set a recurring reminder on your phone, such as "weekly budget check" or a "bills day" so you know when to make those payments on time.
3. Keep your credit utilisation low
Your credit utilisation is a calculation of how much of your overall credit you're using. This calculation shows lenders and the credit bureau how reliant you are on credit. Keeping it low on all your store and credit cards will positively impact your score. It will show lenders that you know how to use credit and you aren't racking up debt that you cannot afford to pay. While different factors are considered when calculating your utilisation, we advise that you use 30 percent or less of your overall credit. This will also help balance what you can afford to pay without struggling to repay it.
4. Only borrow when you need to
While your credit score improves by obtaining credit, you also have to be smart about how you go about it. Do not apply for too much credit in a small space of time for the sole purpose of growing your credit score. This can be a slippery slope because applying for credit too often can also hurt your score. If a creditor requests a hard inquiry (where they look into your credit records to determine how much of a potential risk you can be), these applications will show up on your score and possibly impact your rating. This is because it could indicate uncertainty and that you’re reliant on credit to sustain your lifestyle. Lenders prefer clients who handle their debt responsibility and not seeking credit to stay afloat.
5. Check your credit score
Lastly, it’s important to do regular credit checks. These credit score checks will help you keep tabs on your status and how it’s progressing. You can also see if there has been any incorrect information or fraudulent activity on your record. Any error on your score may prevent you from building a good credit status and prevent you from securing finance in the future when you need it. A credit record check will also help you spot any errors made by creditors so that you can dispute them in time. To check your credit score in South Africa, you can use DirectAxis Pulse, a free credit health rating tool that shows your rating and how you can improve it.
Building credit from scratch will take time and effort. It won’t happen overnight, and there is no quick fix. By continuing to educate yourself on how credit ratings work and knowing what you can do to improve it, you will begin to see your credit score work for you.