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Tread Carefully When Taking Credit, Here’s How You Can Best Build A Credit Profile As A Young Person

  • 5 min read

Being young and independent is a great milestone which most young people fantasize about. Unfortunately, most of them were never exposed to financial education either at home or school and have never attended a “financial adulting” class but are suddenly expected to sign a lease agreement or open a clothing account or credit card.

If you are starting your working life, you may not have credit accounts that you have to honour . The issue is that this also means you don’t have a credit rating. If you don’t have a credit rating, the financial system won’t allow you to access any credit.

It’s a problem usually solved by opening a small account with little exposure or a parent or trusted friend standing surety ( guarantor) for you and agreeing to meet a debt if you slip up and don’t pay. It’s not an ideal position, but it’s often the only way to prove that you are financially responsible, says John Manyike, Head of Financial Education at Old Mutual.

“The easiest way to start building a credit profile is not by taking up multiple store accounts , even if you qualify for them.  If you have just started working and don’t have a credit profile, it’s better to start small and build up from there. If you qualify for credit card for example, it’s in how you manage this credit that will set you on a path to a healthy credit profile in future.”

“To build a good credit record you have to be responsible with how you use debt, The trick is to always stick to the payment arrangement, always pay on time and to avoid over exposing yourself by taking too much credit as this is likely to weigh you down overtime and most likely impact your rating. Remember the aim is to build a good rating over time so as a young person, you have all the time on your side.”

Missed payments can stay on your credit record for 6 years and this can ruin your chances of accessing good credit such as a home loan in future. Know your credit utilisation limit, a credit utilisation is the percentage of your total credit used from the credit available to you. For example, if the credit available to you is R10 000 and you have only used R3,000, it means your credit utilisation is 30%.  Do you your best to keep it within 30% as it shows you are in control of your finances, and you stand a better chance of accessing credit in future when you really need it for important things like buying a house.  The higher your credit utilisation rate the lesser the chances of accessing credit in future.

Here are a few things to keep in mind about managing credit:

  • Understanding that unless the full monthly instalment due is paid every month, the amount outstanding will attract interest which could be high. It is best,
  • If you have a credit card, settle the amount within 55 days to avoid interest.
  • Setting a budget. Your card’s spending limit does not mean you must spend that amount. If you think the limit offered could tempt you to overspend, ask the bank to lower it.
  • A credit bureau will give you a higher score if your card expenses are paid on time, every time. Even paying a day late can impact your rating negatively.
  • Spending under your limit every month and having credit available proves that you are financially responsible and can manage your income. Generally, aiming for a spending limit of about 30% less than your limit is good for your rating.

“If for example, you have a history of responsible credit card usage, the biggest advantage is that it is one of the best reference points for credit bureau to check on your ability to manage debt,”

“ Card operators allow users to pay a sum below the amount due on a card. If you need to do this, pay more than the minimum, as the unpaid balance attracts interest. A few bad months and the money owing and added interest could spell financial trouble,” says Manyike.

“ With many operators and banks offering credit cards, it can be difficult to choose one,” he says. Some things to think about when applying for your first credit card are:

  • The terms and conditions that apply to different categories of cards. It always pays to read the fine print and understand:

–        If a period of interest-free credit is offered, how long this is.

–        The costs attached to the card.

–        The interest charges that apply for budget purchases and overdue payments.

–        What conditions apply if you want to use the card while travelling internationally.

–        The validity period of the card.

–        How often card limits and costs are reviewed

Make sure you include credit insurance when you take credit to cover risks such as retrenchment, death and disability as sometimes life happens.

“The choice of cards is yours. There are plenty of offerings online and at financial institutions. What is important is establishing a relationship with a service provider who can offer you additional services and solutions as your rating grows but the most important take-out should be to always use credit responsibly,” concludes Manyike.