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South Africans spend around 75% of their take home pay on debt settlement – yet almost half of them still struggle to meet their repayment commitments. These figures from a 2020 South African Reserve Bank report paint a worrying picture. But not all debt is bad. There are ways to positively manage debt to build a strong credit rating which, in turn, can be life changing.
Ayanda Ndimande, Strategic Business Development Manager: Retail Credit at Sanlam, says, âCredit can help us achieve a goal, like buying a house, pursuing higher education or starting a business. To get credit for these things, you need a good credit score. To build a good credit rating, you need a strong credit history, and you can influence it by taking simple steps to positively manage your debt.
Credit management takes time and thought. In the current financial climate, many have had to default on existing debt obligations. Ndimande adds: âThe real incomes of South Africans have fallen by 21% in five years, according to DebtBusters. Currently, South African consumer debt stands at $ 1.9 trillion, of which $ 20.4 billion is in default from January to March of this year. Failure to pay has a negative impact on a person’s credit rating. This has far-reaching consequences if one wishes to apply for a home loan, vehicle financing and other types of credit down the line. “
Your credit rating
A credit score is calculated from a person’s credit history and takes into account the following (FICO model):
- Payment history: approximate score weight: 35%
- Amount due: 30%
- Credit term (takes into account your oldest account, the most recent account and the average age of all your accounts): 15%
- Credit mix (the different types of credit accounts you have): 10%
New credit (opening lots of new accounts in a short time makes you more risky): 10%
Ndimande says, âManaging your credit starts with knowing your credit score.
âOnce you know your credit score, you may be able to negotiate better interest rates if your score is strong. If your score is not where it should be, it is wise to act quickly to reverse the trend.
How to improve a credit score
Things that negatively influence a credit score include late payment of debt, maximizing credit facility, and incurring a lot of debt in a short period of time.
Once you know your credit score, here are some small steps to improve it:
- Always pay your debts on time
- Take your credit utilization rate into account. This is the amount of revolving credit you are currently using divided by the total amount of revolving credit you have. Ideally your credit utilization rate should be closer to 30% and for a very good credit score it should be around 10%.
- Know your affordability and only take out the credit you need and can afford to pay off
- Negotiate with creditors on premiums and make sure you adhere to these provisions and pay the agreed amount, on time
If you’re just starting your credit journey, consider starting small, with a cell phone contract, for example, or a credit card. Ask the bank to cap the amount of the credit card to a number that works for you, not necessarily what you’re entitled to.
If you find that there are “more months to the end of your money,” personal finance author Mapalo Makhu points out that payday loans are not the solution. In her recent video, she suggests prioritizing an emergency fund and increasing her income by asking for a raise at work, starting a side business, or simply reworking a budget to cut unnecessary spending.
Ndimande concludes, âYes, you can use your existing debt to improve your credit score, if you make a commitment to pay it off on time and closely monitor your utilization rate. Before you get into more debt, ask yourself what it will help you achieve. Is this going to manifest itself in a positive and constructive way?