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A good credit score is not only necessary when you want to buy a house, car or to fund your studies, it can also save you money. Having no credit history can also count against you.
Ayanda Ndimande, Head of Business Development at Sanlam Retail Credit, explains the importance of a credit score and how to start building up your credit history:
No credit history? Here's how to start
If you are starting and don't yet have a credit history, the responsible use of a credit card is a good way to start.
"It might sound counterintuitive to suggest building a credit history using a credit card due to the high interest rates. However, if you commit to paying it off every month, this payment method gives you more flexibility than a retail clothing account or a cellphone contract. Responsible use of a credit card will also put you in good standing with your bank for bigger credit purchases in the future, such as applying for a home loan or car finance," said Ndimande.
Ndimande recommends depositing your money into your credit card and using only what is there. "This will give you the benefits of a credit card without having to go into debt or paying debt fees, and it will improve your credit score." She suggests opening an account or a credit card with a specific limit you can afford. If the bank offers a higher limit, ask for a reduction to avoid temptation. Use the account with caution and make payments on time.
"Remember that building a good credit score is about behaviour over time; it is not a once-off exercise. Maintaining a healthy credit score should form part of your financial planning. After all, at some point in your life, credit may be necessary to empower you to achieve your goals," said Ndimande.
Not all credit is bad
Many of us were raised believing that all credit is bad, but that is not true. When used responsibly for things that increase your net worth and generate value, credit can empower us to realise our goals and live confidently.
'Bad debt' refers to unnecessary debt that does not increase your wealth in the long term, such as a retail store account or taking out a personal loan to pay for a holiday. Student loans, home loans, and vehicle finance are examples of 'good debt'. A personal loan could also be used for good, for example, to fund renovations to increase your home's value.
Most South Africans will need credit to buy a property or a car. 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 dependable you are. A poor credit score - or having no credit history - could result in you not qualifying for a loan or being approved for less than you applied for. A poor credit score will also likely result in higher interest rates, costing more in the long term.
Do a credit score check
Managing your credit starts with knowing your credit score. South Africans are entitled to a free credit report every 12 months from TransUnion and other credit bureaus in South Africa. You can also get a free credit report via the Sanlam Credit Solutions dashboard as often as you like without affecting your score.
While knowing your credit status is good, understanding it and improving it is even better.
Questions may be edited for brevity and clarity.
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