A good credit score isn't on young people's minds ... but it should be: economist

When this year's matric students finish their exams, a good credit record will probably be the last thing on the minds — but it should not be.

Gareth Levinsohn, the chief commercial officer of Shapiro Shaik Defries and Associates, says is it crucial for youngsters to take care of their financial health from an early age.

Levinsohn said it will be difficult for matriculants to buy assets on credit when they land their first jobs if they do not have a credit record — or if it is not good. He said it could take up to 18 months to build up a meaningful credit record.

“As a rule of thumb, get started with a very manageable, interest-free credit facility that you can easily afford, and instead of paying cash, buy something using this facility.  Make sure that you make all your instalment repayments on time, every month, and pay the minimum required amount — or more — each time.  A cellphone contract or retail store account are good options. The proviso is that you must be able to afford the repayments and that you pay consistently — the objective is to demonstrate your maturity and responsibility when it comes to managing your credit,” Levinsohn said.

“As much as you hear the adage that ‘cash is king’ — and which is a good motto to follow for consumption-type purchases — there are many big-ticket items that very few people can afford to buy for cash — think property, car, large appliances, tertiary education and so on. 

“Most people will need a credit facility to be able to afford these purchases, especially when you consider that a house will take you about 20 years to pay off and a car about five years or more.  Your credit score and past credit behaviour plays a fundamental role in being able to qualify for such loans and will also define the terms and interest rates you qualify for — obviously the better your credit score, which means a lower risk profile to the lender, the better the terms and interest rates you can expect to receive.”

Levinsohn explained: “Your credit score is calculated by a credit bureau using all the details on your credit profile, with your score reflecting a summary of all your financial decisions and behaviours as you start transacting with various banks, credit providers, retailers and so on.”  He went on to list some of the factors that damage one’s credit score.

“Missing or late payments will hurt your credit score. Even if you double up on the instalments in the following month to catch up, the inconsistent payments will reflect.  The same applies to ‘adverse legal information’ — though this information is cleared as soon as the account is settled, the negative repayment history stays on your profile for a number of years,” he said. 

“Multiple credit enquiries and high credit utilisation — a sudden uptick in credit applications in a short period will red flag on your credit profile, as will a consistently high credit limit utilisation.  Try to keep your usage to less than 50% and ideally at 35% of your credit limit.  Balances that are always close to your limit suggests that you are living on credit to get by. Any credit enquiries will reflect for up to two years.”

Levinsohn advised against having a “number of unused credit facilities” and warned about court judgments which “negatively affect your score”. He encouraged debtors to make arrangements with creditors when they run into financial difficulty.

“It takes six years to calculate your credit score, so a credit history shorter than this will bring your score down. By the same token, it means that any missed or late payments history will stick about for six years too,” Levinsohn said.

“If you run into payment difficulties, be proactive and make arrangements with the credit provider. We may be living in challenging pandemic times, however the fact remains that your debt is not going to go away. Rather proactively approach and negotiate with creditors and lenders. If contacted by a collection’s agent, explain your situation so they can work with you to find a solution or make alternative payment arrangements where appropriate. 

“But don’t ignore the calls. A lack of any response from you will simply see it role into the legal stage and this becomes imminently more challenging and negatively affects your credit rating and future personal financial health. If you’re in a genuine bind, consider a debt consolidation process where professionals can help and negotiate on your behalf and ensure that you rehabilitate yourself and avoid a legal process.”

He said “serious credit impairments such as late payments, default judgments, insolvency and legal action can stay on your credit record for up to 10 years”.

“Considering the importance of your positive credit score to your current and future financial security and wellbeing, there’s every reason to practise healthier credit behaviour and management from opening your very first account and treating your credit score like the gold that it is.”

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