Credit ratings and your debt

Credit ratings

Your credit ratings are based on how well you pay your debt! Paying your instalments on time, and in full, increases your credit rating. At the same time though, having no debt decreases your credit rating.

So how do you maintain a good credit rating when you don’t want to have any debt? Unfortunately, there is no way to do this without having at least one debt.

Personal case story

Many years ago (approximately 25 years) before the children were born, I had paid off my Edgars account in full. Then my husband needed a new suit. Off we went to Edgars because I had enough credit on my account for a suit. We found the suit he liked and that fitted him and went to pay.

The suit was a little over the credit limit on my card. I wasn’t worried, because I (erroneously) thought since I didn’t owe anything on my account this wouldn’t be an issue.

You have to owe money to borrow money!

That’s when I discovered you have to owe money to borrow more money. I had to pay in because I hadn’t used my account within the four months in which the balance was zero and they weren’t able to allow me to go over my limit!

I haven’t been out of debt since! On the other hand, my credit rating is great!

So how do you have debt for your credit rating without getting into debt?
I have learned about a few different ways to do this. Obviously, the best way is through a home loan as this is something you must pay every month or risk losing the roof over your head, it also has a lower interest rate than other debt.

A home loan is a good debt to have.

That being said, not everyone can own a house/apartment but it should come before owning a car. You also need a positive credit ratings to apply for a bond!

Below are some bad but sometimes necessary debts.

The next one up is the car. Once again not everyone can afford a car and, without credit ratings, getting the loan for the car purchase is almost impossible.

Your other option is a credit card. The catch with the credit card is that you get deeper into debt and the interest rate is quite high if you don’t pay the balance in full each month.

To apply for a credit card the bank or lending institution wants 3 months’ payslips to determine your credit limit.

Getting credit when you are self-employed

Those who are self-employed, or an independent contractor, this may prove a little difficult. There are a lot of hoops to jump through but it can be done.

To use a credit card to create positive credit ratings requires careful discipline with your spending, as most credit cards come with at least R5000 as a credit limit. It is easy to pay the instalments on R5000, but not so easy to pay the full balance.

The balance must be paid in full each month or interest is charged and that R5000 will take a few extra months to pay and land up costing almost twice what the original purchase was.

For me, choosing a clothing store card is possibly the best way to go if you are unable to do the credit card thing but need to develop a credit rating.
Some of the stores offer 6 months interest-free or 12 months with interest.

I would choose a card that is linked to many different stores. Also, turn down any credit limit increases you are offered.

Pay on time and in full

The better your payment history the more likely this is to happen.
In my opinion, we should not use credit or store cards for anything. We should be paying cash or using a debit card when making a purchase. The exception being a house or a car and even then, try paying them off as soon as possible.

Please remember this is my personal opinion and advice. I am not a financial expert but I know what it is like to live with debt and how it causes stress in your relationships and on your health.http://kasheringyourlife.co.za/10-things-about-budgets-and-debt/

This article is written from my own personal experience and research, having been to a debt consolidation company, paying off a huge personal debt, owning multiple credit cards and being in great financial difficulty!

Your aim is for your debt to give you positive credit ratings.

Feel free to join the Facebook group https://www.facebook.com/groups/iamdebtfree/ where I will post tips as I learn them and sometimes budget and other financial worksheets as I discover them. The aim of the group is to help myself and other South Africans get out of debt and stay that way.