Building a credit history

In today’s real estate market it is imperative for consumers to establish an excellent credit record and maintain it.  By establishing a credit history, consumers ensure their best possible chance of bond approval, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

“Having a favourable credit record is essential for consumers who aspire to own property. While lending criteria is not as stringent as it was when the National Credit Act (NCA) was initially introduced, the requirements in the current market are still strict and it is likely to remain that way for some time,” he says. “Just as important as a positive credit score is an established credit history that shows that the consumer can conduct their credit responsibilities in a favourable manner. A consumer’s credit history will have an impact on whether or not the loan is granted and if the loan is granted, it will influence the interest rate at which the bank will finance the deal. Financial institutions use this information to assess the probability of the applicant defaulting on their payments, which will in turn give them an idea of whether or not granting the loan is a high risk.  Those who have finished their studies and are preparing to enter the job market will need to ensure that they take the necessary steps to build a good credit history.”

According to Goslett, financial institutions will generally look at how a prospective homebuyer has conducted their credit accounts over the last six months, so if an applicant wants to ensure an optimum chance for approval, they will need to have an excellent credit record and history for at least the six months prior to submitting their application. He notes that establishing a credit history is slightly more challenging due to the fact that lenders are extra cautious of new applicants. Goslett offers a few tips for so those who want to establish a credit history and are applying for credit for the first time:

Easy does it

Don’t apply for too much credit at once and only apply with a reputable credit provider. Goslett says that it is best to start off slowly and only apply for small amounts that are easily manageable. He explains that applying for too much credit will send the incorrect message to the lender and they will think that you are desperate. It is also important to only make one application at a time, as too many applications for credit facilities will have a counterproductive effect that could negatively impact the consumer’s credit score. Pay down accounts as soon as possible, and be sure you don’t take out more credit than you can afford to pay back.

The power of three

As a general rule the consumer will require at least three lines of credit. With less than that the credit history might be considered to be too thin, however with more it may be considered too much. Goslett says that the golden rule is for consumers to make sure that they always leave a 30% or higher gap between what they owe and the credit limit as lenders will look for this minimum gap. 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.

Have different types of credit

The credit score algorithm likes to see different kinds of accounts. Applicants should not just have revolving credit, but where appropriate, a closed-end loan or account such as a car loan. Goslett says that how the various accounts are managed is more important than the variety of the credit. He notes that is very important that all accounts are paid according to the loan agreement and no late payments are made. This will reflect responsible financial behaviour.

Deposit money into a savings account

Start to build a good bank account balance by depositing money into a savings account each month for your home loan deposit, as this will show financial stability. Goslett says that the fact that you have a deposit saved up will stand you in good stead and improve your bond approval chances.

Goslett concludes by saying that consumers should remember that even with an established credit history and excellent record, homeowners will need to be able to afford their monthly repayments. Affordability and disposable income will remain the crux of the bond approval process in the year ahead.

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