Being credit-free has shortcomings

2010-10-23 11:46

Farrah Francis may think she is on the path to financial responsibility if she destroys her store cards and says no to a credit card.

After all, borrowing simply means getting into debt, and debt is bad – right? Well, the answer is not that simple. In fact, if you have no credit record, you remain an unknown quantity to someone who may want to lend you money. Some of the questions the lender will be asking are: Will you pay back? Will you pay on time? Are you likely to take your debts seriously, or will you make late or erratic payments?

For this reason having a good credit record is very important for a young person. Showing that you can manage a bit of financial responsibility, in the form of some limited debt, will stand you in good stead later on when you want to apply for motor finance or a bond for your first home.

Your credit record is the history of your borrowing behaviour, as well as a record that shows how you repay what you owe. Banks and other lenders want to see that you have paid back money you owed, regularly (monthly payments are usual) and on time (on or ­before the due date stipulated). If you can show you have done this, you have a good credit record.

By contrast, a bad record will show that you are happy to take on credit but you are not good at repaying the debt. This implies that you spend excessively, you don’t pay on time, you don’t pay the minimum amount and you make no plans to pay off amounts owed. This is a red light to potential credit providers.

Start with your bank
According to Ryan Prozesky, head of credit and pricing at FNB Home Loans, customers might want to start off by building a good relationship with their bank.

Prozesky advises: “Your bank will want to see how you manage your ­current or cheque account. How do you manage your cash flow? Are your debit orders returned? Are you able to save, not just pay off a debt?”

Once you have proved you can manage your account responsibly, you can consider building up a small credit profile. Prozesky says having a credit card isn’t necessarily a bad thing, provided you take advantage of the 55 days’ free interest and pay in full every month.

In fact, he says, a credit card that is paid off in full each month improves your credit record. “You don’t really want an interest burden. If you are ­worried about meeting the monthly payment, use a debit order to ensure the payment is made on time. You will need to make sure you have the money in your account, though.”

Try not to use more than 50% of the available credit – that way, if you need money for an emergency, you will be able to sort that out and still be able to service your debt. Make sure you sign up for the bank’s SMS notification system so that you are updated on your available balance every time you swipe.

You could also open a store account and use a store card – again, provided you can manage it wisely.

Remember not to overspend, stick to a budget and have a repayment plan.

How a good credit record helps you
A good record will enable you to take on bigger loans in future – you can start with a cellphone contract and progress to a car or house.

The way you manage your debt is not only good for credit providers but can also affect your insurance premiums. If you miss payments on your credit card or your store card, your insurance policy may become more expensive as you are perceived as a payment risk.

Also, if you are not responsible with money, how are you going to drive?

It may seem unfair, but there is a ­perception that if you default on a loan you may also be less than vigilant when it comes to activating your car alarm, for example. It all comes down to a ­basic sense of personal responsibility.

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