#CreditOpportunities #FinancialJourney
Imagine being turned down for your first home or car simply because you’ve always paid in cash. Sounds unfair, right? Welcome to the world of credit scores, where your credit history and rating can play a key role to make or break your future financial opportunities. It is beyond important to have an established credit history as well as a strong credit rating.
“You might think that paying for everything in cash and avoiding debt is the safest way to manage your finances – it’s simple, and there’s nothing to repay. However, when it’s time to make big purchases, like a house or a car, this ‘cash-only’ and ‘non-credit-track-record’ approach can work against you. According to the latest statistics from the National Credit Regulator (Consumer Credit Market Report), over 67% of credit applications were rejected by the end of the first quarter (March 2024). This high rejection rate often stems from insufficient credit histories and low credit ratings. Banks and lenders need proof that you’ve successfully managed debt before they can offer you more credit,” explains Wikus Olivier, managing director here at CreditSmart Financial Services.
Let’s break it down with a few examples to explain why a strong credit history (with a high score indication, of course) is essential:
Case Study/Example 1: Lerato’s Car Finance Challenge
Lerato, a schoolteacher from Johannesburg, is excited about buying her first car. She’s always paid items with cash and avoided debt, thinking it was the safest way to manage her money. However, when she tried to get car finance, she was surprised that her application (via various banks) was rejected. Why? Because she had no credit history. Without a sufficient credit rating and track record of borrowing and repaying, creditors could not tell if her credit behaviour is a good risk or not.
“In fact, the latest NCR-statistics indicating a low vehicle finance approval rate can add to the importance of having an established credit history when applying for such a much-needed loan,” comments Olivier.
Case Study/Example 2: David’s Successful Home Loan Application
Let’s look at David’s journey as a young practicing attorney. After guidance from his father, he realised the importance of a good credit (track) record and rating. He started small: he got a credit card and a store card. He used the credit card for everyday purchases and always paid the full amount on time. In just a year, he built up a strong credit (track) record and score and got the heads-up on his home loan with favourable terms.
“From the highlighted statistics, it is evident that home loans have the highest approval rate among credit types,” confirms Olivier. Building a strong credit profile over time can increase your chances of securing important loans like mortgages.
How to Start Building Your Credit Score & Ensuring a Favourable Credit History
If you’re starting to build your profile from scratch like Lerato, here’s what you can do:
- Open a retail/store account: Consider something small that you can manage easily.
- Pay on time, every time: Ensure you pay your instalment when due, every month. This shows that you’re reliable.
- Keep it steady: The longer you have accounts and keep them in good standing, the better it is for your credit score and track record.
- Diversify your ‘credit mix’: As you become more comfortable managing credit, consider different types of credit accounts to demonstrate your ability to handle various financial responsibilities.
Take Control of Your Credit
Building your credit profile might seem a bit daunting, but it’s really about taking small, manageable steps. Whether you’re like Lerato, just starting out, or you’re planning a big move like David, it pays to have a good credit history and score.
“With a near 70% of South African consumers facing credit application rejections, taking charge of your credit score and record is not just advisable; it’s essential. Remember: A strong credit history with a good credit rating is like a ‘financial visa’, it opens doors to better financial deals and can save you more than a few rands in interest over your lifetime,” concludes Olivier.
Don’t let a lack of credit history hold you back from achieving your financial dreams. Start building your credit profile and score today to open the door to new financial opportunities.