4 Simple Steps to Building a Credit History

4 Simple Steps to Building a Credit History

In today’s financial landscape, having a solid credit history is crucial for accessing various financial products and opportunities. Whether you’re planning to buy a home, secure a loan for your business, or even apply for a credit card, your credit history plays a significant role in determining your eligibility and terms.

However, if you’re new to credit or looking to improve your credit profile, building a positive credit history can seem daunting. But fear not, as we’ve outlined four simple steps to help you kickstart your journey to building a strong credit history in South Africa.

1. Understand the Basics of Credit

Before diving into the world of credit, it’s essential to understand the basics. Credit refers to the borrowing capacity extended to an individual by a lender, with the agreement to repay the borrowed amount, usually with interest, at a later date.

In South Africa, credit is typically extended through various financial products such as credit cards, personal loans, vehicle finance, and mortgages.

2. Obtain a Credit Report

The first step in building a credit history is to know where you stand. Obtain a copy of your credit report from one of the major credit bureaus in South Africa, such as Experian, TransUnion, or MyCreditCheck. Your credit report provides a detailed record of your credit history, including information on accounts opened, credit inquiries, payment history, and any defaults or judgments.

Reviewing your credit report allows you to identify any errors or discrepancies that may be negatively impacting your credit score.

3. Establish Credit Responsibly

Once you have a clear understanding of your credit status, it’s time to start building a positive credit history. One of the simplest ways to do this is by applying for a secured credit card or a small loan. Secured credit cards require a cash deposit as collateral, making them accessible to individuals with limited or no credit history.

By using your secured credit card responsibly and making timely payments, you can demonstrate your creditworthiness and establish a positive payment history.

3.1. Start Slow and Small

Don’t apply for credit at too many places. The trick is to start small and slow, and build up with reputable credit providers. Applying for too much credit might send the wrong message to the lender and it might make you seem desperate. Too many applications might also have the opposite effect and have a negative impact on your credit rating.

Pay back as much as you can as fast as you can and be sure to only take out the credit that you can afford to pay back.

3.2. Familiarise Yourself with the Power of Three

The usual credit consumer will require at least three lines of credit. Less than three might lead to the lender reconsidering the loan because the history will be seen as too thin. In the same breath, more than three will seem like too much. In an ideal world, it is advisable for you to leave a gap of 30% or higher between what you owe and your credit limit as lenders will look for this minimum gap!

It is also vital that you still have the necessary disposable income needed for bond approval in the future. Work out a budget and stick to it.

3.3. Diversify Your Credit Accounts

Instead of having one type of credit, diversify and have different types of credit accounts. This will be received positively by credit score algorithms. Applicants should not just have revolving credit, but also have a closed-end loan or an account like a car loan. As much as variety can be a good thing, the main point that loaners look at is how well these accounts are managed.

All accounts should be paid accordingly with no late payments. Correctly managing your accounts will reflect responsible behaviour.

3.4. Prioritise Savings

Putting money into a savings account reflects financial discipline and stability and builds a deposit at the same time. Having a deposit saved up will improve your chances further of being approved for a home loan. Even with an established credit history, you will still need to show the bank that you have the necessary levels of affordability to pay back the bond.

Be realistic about what you can afford and budget accordingly. Make sure that you are taking the necessary steps to building a good credit record and maintaining it in the long run.

4. Manage Your Credit Wisely

Building a credit history is not just about obtaining credit but also about managing it responsibly. Make it a habit to pay your bills on time and in full each month, as payment history accounts for a significant portion of your credit score. Remember, keeping your credit utilisation ratio below 30% is considered optimal for maintaining a healthy credit score. Higher utilisation ratios can indicate to lenders that you may be over-reliant on credit and could potentially be at risk of financial strain, which could negatively impact your creditworthiness. Therefore, it’s generally advised to use credit responsibly and not max out your credit cards to keep your credit utilisation ratio in check.

Furthermore, monitor your credit report regularly to ensure that all information is accurate and up to date. Dispute any inaccuracies promptly to prevent them from negatively impacting your credit score.

Lastly, be cautious when applying for new credit, as multiple credit enquiries within a short period can lower your score.

In closing

Building a credit history in South Africa requires patience, discipline, and responsible financial management. By understanding the basics of credit, obtaining your credit report, establishing credit responsibly, and managing your credit wisely, you can lay the foundation for a strong credit profile that opens doors to various financial opportunities. Start your journey to financial empowerment today by taking these simple steps towards building a positive credit history.