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Your credit record: Small steps can lead to great rewards

One of the mysteries of modern life is why so many smart young people seem to know so little about really managing their money or building their financial future.

“For a start,” says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s biggest mortgage originator, “most of them aren’t aware of the importance of a good credit record until they apply for a cellphone contract, try to buy furniture on account or perhaps seek to finance their first car – and are turned down.

“Even when they already have a bank account, a student loan account or an account at a clothing store, they often don’t understand that how they manage these accounts right now can have a really significant impact on their lives in future.

“They may not think it’s a big deal to be overdrawn at the end of every month, for example, or to be erratic in how and when they pay their small monthly account instalments, but the truth is that this all goes on their credit record and could really count against them when they want to access any further credit later on.”

On the other hand, he notes, taking the time now to develop good credit habits even on “small beans” accounts and to build up a good credit profile could save them a substantial amount of money later on.

“That’s because when lenders and credit providers look at credit records, they are not only checking to see how much credit you already have and whether you can afford another monthly repayment. They also want to see if you have a history of good credit management - like paying all your bills on time - and are generally a good ‘credit risk’ who is unlikely to default on a loan, a lease or a hire-purchase contract.

“And if you do have a good credit rating, it will not only be easier for you to obtain new credit but also to negotiate a preferential interest rate that could translate into significant savings. Currently on a personal loan of R100 000, for example, your monthly repayment could be as much as R3000 or as little as R2100, depending on the interest rate the lender decides to apply based on your credit profile. That means you could save almost R54 000 over five years if you were able to get the loan at the right rate.”

Similarly, Rademeyer says, you can save money on car purchases and 20-year home loans. “For example, the current variable home loan rate is 9,75%, and if you were granted a R1m home loan at that rate the interest over 20 years would amount to almost R1,3m. However, if you had a good enough credit rating to cut just 0,5% off that interest rate, you would shave some R78 000 off the total cost of your home over 20 years.

“In short, every little thing does matter when it comes to managing your finances, and the sooner you start to actively build a good credit record, the better.”

One way to start, he says, is to make sure that all your current bills are paid on time and in full. “If your rent is due on the first of the month, make sure you always pay it then, or the day before. If you have a clothing account or a student loan to pay off, make sure the instalments are always paid in full by the due date. If you have a credit card, you should only use it for small purchases and then pay these off completely at the end of every month.

“Next, you need to establish an overall financial ‘game plan’ that will enable you to make smart spending and repayment decisions going forward. To avoid maxing out your credit card, for example, you need to be deliberate in the way you use it and work out a realistic timeline for paying any major purchase back. If it is going to take too long, incur too much interest or affect your other financial plans, you may want to rethink it – or at least put it off until you can pay cash.”

And finally, says Rademeyer, you really should start saving. “At the very least, open a bank savings account and start putting 10% of absolutely everything you earn into it. You might think of this as an emergency fund, a travel fund, a new-car fund or as a deposit on your own home one day – it doesn’t matter. What counts in terms of your credit record, and your financial future, is that being able to save some of your income every month is further evidence of your ability to manage your money really well.”



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