How to build a credit history

Establishing and maintaining an excellent credit record is imperative for consumers who want to own a home, says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.

“Those who aspire to buy a property will require a favourable credit record to improve their chances of bond approval. Although lending criteria has softened marginally since the introduction of the National Credit Act (NCA) six years ago, banks are still strict with their lending policy, and it is likely to remain that way,” he says. “Just as important as a positive credit score is an established credit history that shows that the consumer can favourably conduct their credit responsibilities. A consumer’s credit record will have a bearing on whether or not their bond is approved, as well as the interest rate at which the bank will finance the deal. Credit information is used by banks to assess the probability of the applicant defaulting on their payments, providing insight into whether the loan is a low or high risk. Consumers who are just starting their careers will need to ensure that they take the necessary steps to build a good credit history.”

Banks will generally look at how a prospective homebuyer has conducted their credit accounts over the last six months. For this reason, applicants who want to ensure the optimum chance of approval, need to have an excellent credit record and history for at least six months before submitting their application. Goslett says that establishing a credit history can be slightly challenging because lenders are extra cautious of new applicants. He offers a few tips for those who want to establish a credit history and are applying for credit for the first time:

Start slow and build up

Don’t apply for credit at too many places but rather only approach reputable credit providers. Instead of applying everywhere hoping for a positive response, it is best to start off slowly and only apply for small, manageable amounts at a time. “Applying for too much credit will send the wrong message to the lender, as it will make you appear desperate. Also, only apply at one place at a time, as too many applications to credit facilities could have the opposite effect and negatively impact your credit score. Pay down accounts as soon as possible, and be sure not to take out more credit than you can afford to pay back,” advises Goslett.

The power of three

On average, a consumer will require at least three lines of credit. With less than that the credit history might be considered to be too thin, however, more might be viewed as too much. “Ideally, make sure you always leave a 30% or higher gap between what you owe and your credit limit as lenders will look for this minimum gap,” says Goslett. “It is also vital to still have the necessary disposable income required for bond approval in the future, so work out a strict budget and stick to it.”     
Don’t stick to one kind of credit

Rather than having one type, diversify and have different kinds of credit accounts as this is seen favourably by credit score algorithms. Applicants should not just have revolving credit, but, where appropriate, a closed-end loan or account such as a car loan. While variety is good, how each of the accounts is managed is still far more important. It is vital that all the accounts are paid according to the loan agreement, with no late payments. Correctly managing your credit accounts will reflect responsible financial behaviour.

Deposit money into a savings account

Putting money aside in a saving account will reflect financial discipline and stability while at the same time building a deposit. According to Goslett, having a deposit saved up will stand you in good stead and improve your bond approval chances.

In closing, Goslett says that even with an established credit history and record, you still need to show the necessary levels of affordability required by the bank. When purchasing a home, especially for the first time, be realistic and budget accordingly. Make sure you know what you can afford and start taking the necessary steps towards achieving a healthy credit record and deposit amount.

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