Decisions, decisions, decisions…Welcome back to another months issues of finance, with me Khaya Langa. It’s early stages of the year and it’s time to put the years financial objectives into 1st gear. 

Most of us have decisions to make based on our needs and preparations for the year. Is it buying your first car, buying a house or deciding on which career path to venture in to? Regardless of what it is, what do all these decisions have in common, you might ask? The simple answer is, they need money. If you have cash for all this, well good for you, we are really happy for you, but like the average Jabu or Jennifer, we all will need assistance from the bank in the form of loans or in corporate(channel 410 upwards) lingo,  CREDIT. Credit can either make you or break you. Unfortunately I find most people don’t know half enough of what they should. Which is why I am here, to guide you and basically hold your hand to the promised land.(You’re welcome) Let’s dive right in!

What is credit?

Simply put, it is the transacton of borrowing money and paying it off over a period of time with small amounts with a little bit more on top, called interest. That makes sense right, we all know the concept  because Grade 9 maths should of covered that. I hope. But the application of it in your adult life is more important than what you would’ve thought. Now follow me closely here. 

There is something called Secured Debt and Unsecured Debt. What’s the difference? As the adjectives describes respectively, Secured debt is debt given to you with the purpose of attaching an asset to it so that should you not be able to make repayments, the borrower can repossess the asset and try recover their debt. (Like a scene from Operation Repo). In this case, the borrower “owns” the asset until you can pay them back at which point you would have settled the debt. Imagine a house and car for ease of reference. Great, still with me right? Good.  Now this is less risky to the borrower because they know there is something they can get should you pull a Payment Houdini. This is why you will generally find that the interest rate is generally lower than Unsecured debt. Now Unsecured Debt on the other hand is given to you without being attached to an asset but as you will find, what is attached to it is your overall credit score and the health of your credit, which if you are younger and don’t pay attention, will negatively affect your future debt needs. i.e buying a house with your beautiful or handsome partner. Unsecured debt can be one of the most dangerous things to your financial well being. Store accounts and credit cards, though useful, have created bigger problems for most people than if they had not gotten it.

What is a Credit rating?

It is a snapshot of your credit history that determines whether you are responsible and dependable at being able to pay off debt. Do you pay debt back late? Do you default (pulling a Houdini)? Here’s the interesting part, there are actually institutions that compile all reports on all your credit transactions. Please help yourself and get to know them. In South Afrcia, they are referred to as credit bureaus. Experian, TransUnion, Compuscan XDS are the four main ones. “Their reports are compiled through information sent to them by credit providers. They highlight and draw upon you’re

• A two-year history of all the credit you’ve applied for

• The credit accounts you have and your payment history with them (including any late or skipped payments)

• Any court judgments or defaults you may have against you

Very important to know. Why? They all affect your standing. And the amount and interest rate you can get.  Before you even look at a house or car, consider the above and do some research. Most credit bureaus rate your credit score between 300 and 850:

• A low score is generally considered to be between 300 and 579

• A fair score is between 580 and 669

• A good score is anything above 700

I can hear what you thinking, “okay Khaya, I get it! How do I build a healthy credit profile?” As has become our financial tango for the last few months, I have a solution. (You’re welcome.)

Building a healthy credit profile”

Read the below, that I “borrowed” from the Investec website. I’ve put the link and reference for you for your convenience

(https://aheadofthecurve.investec.co.za/personal-finance/whos-keeping-score-practical-tips-to-create-a-good-credit-score/ Additional sources: Briefly.co.za; Transunion.co.za, BusinessTech.co.za)

“

• Check your credit report regularly to see that all information is up to date.

• Make repayments on any credit accounts by the due date. A good way to be disciplined in doing this is to set up standing debit orders where the payments are made automatically each month.

• Make sure you pay the full instalments every month. For example, only paying half the instalment one month and then the remaining payment the following month will prejudice your credit score.

• Have a repayment plan you can realistically manage. If you’re struggling to repay your debt each month, try and negotiate a new repayment plan with your credit provider – for example by reducing the monthly repayment amounts while increasing the length of the loan.

• Close any credit accounts that you’re not using, such as store cards from a shop you no longer buy from regularly, or old credit cards.

• Limit the amount of credit you’re using. Aim for a ratio of 35%, where if you have a credit card with a R10 000 credit limit, you aim to keep the balance at R3 500 or less on any given month.

• Avoid too much unsecured debt: Secured loans like a home or car loan are always preferable to unsecured loans, so make sure that the balance is weighted this way in your financial portfolio.”

The importance of managing your debt (which we went through on last months issue) is by far the major factor in solving  what we have looked at today. Essentially at all stages of life, whether to begin your financial journey or to navigate the position you are in currently, it is highly likely that you will require debt. And because you understand this is true, the information above has not only been vital to give you a birds eye view of what you will need but has also added a strong sense of desire in you now choosing to find out how you can better help yourself. Yes, through this articles and future articles to come. The more you read these words again and again the more it becomes clear to you that being in control of seeking the right advice is paramount! I will see you again next month.

There are four main credit bureaus in South Africa: Experian, TransUnion, Compuscan XDS. Every month, credit providers send transaction details to these bureaus, who then compile the information into a credit report, consisting of a consumer’s credit history and habits.

When you apply for credit, the financial institution you’re applying through will pull a credit report from one of these four bureaus. The report typically includes:

• A two-year history of all the credit you’ve applied for

• The credit accounts you have and your payment history with them (including any late or skipped payments)

• Any court judgments or defaults you may have against you

There are two types of credit: secured credit means borrowing against an asset such as a home or a car, while unsecured credit includes things like store cards, credit cards or personal loans.

A credit report is a snapshot of your financial behaviour that reflects how you manage your debt and reflects how much of a credit risk you’re likely to be.

Most credit bureaus rate your credit score between 300 and 850:

• A low score is generally considered to be between 300 and 579

• A fair score is between 580 and 669

• A good score is anything above 700

It’s worth noting that credit providers will also look at other factors. like your debt to income ratio – so even if you have a good credit score, a high level of debt can negatively affect your credit risk.

How can you build credit?

Having a good credit rating can save you money in the long run, as you’re likely to be offered a good interest repayment rate.

Since financial institutions consider how long you’ve had access to credit for, not having any or enough credit can affect your rating and overall score. So, how can you build good credit? Here are five possible ways to start building credit if you have not held credit in the past:

• Apply for a credit card or loan with your bank with whom you already have a savings, cheque or current account

• Get a retail credit card, such as an account with a clothing store

• Open a joint account with your spouse or partner as the co-signer (you could ask your parents if you are single)

• Increase your existing credit limit

• Maintain a healthy mix between unsecured and secured credit

Here are some guidelines for doing this:

• Remedy any negative listings: If you have any defaults or judgments against you, settle these outstanding amounts as soon as you can. After this is done, make sure that you get proof of settlement, which you can then use to clear the negative listing with the relevant credit bureau.

• Check your credit report regularly to see that all information is up to date.

• Make repayments on any credit accounts by the due date. A good way to be disciplined in doing this is to set up standing debit orders where the payments are made automatically each month.

• Make sure you pay the full instalments every month. For example, only paying half the instalment one month and then the remaining payment the following month will prejudice your credit score.

• Have a repayment plan you can realistically manage. If you’re struggling to repay your debt each month, try and negotiate a new repayment plan with your credit provider – for example by reducing the monthly repayment amounts while increasing the length of the loan.

• Close any credit accounts that you’re not using, such as store cards from a shop you no longer buy from regularly, or old credit cards.

• Reduce your overall credit balance as much as possible. If, for example, you receive an unexpected lump sum or a bonus at the end of the year, use part or all of it to reduce the overall credit amount that you owe.

• Limit the amount of credit you’re using. Aim for a ratio of 35%, where if you have a credit card with a R10 000 credit limit, you aim to keep the balance at R3 500 or less on any given month.

• Limit the number of credit applications you make. Keep in mind that your credit report shows how many credit applications you’ve made in the last two years. It may sound counterintuitive, but if you shop around for too much credit at once, it may look like you’re struggling to manage the amount of debt you currently have.

• Avoid too much unsecured debt: Secured loans like a home or car loan are always preferable to unsecured loans, so make sure that the balance is weighted this way in your financial portfolio.