Blurb: Young consumers are a growing segment of the credit market. Responsible credit use in your student and early working years can help you establish a solid credit record for yourself, so don’t let bad choices today hamper your bright financial future tomorrow
Data from the credit bureaus and credit providers shows that youth (18-40) are very active in the credit market. Compuscan, for example, recently found that in Q4 2016 South Africans under 40 years of age “accounted for 75% of all short-term fixed-term loans extended by lenders as at the end of 2016”. Old Mutual’s 2016 Savings & Investment Monitor report found an increase in all types of personal loans among youth. Their survey respondents also reported that they are less optimistic about the future than the previous year, and three in four youths expect to support their family members.
This paints a picture of a credit-stressed youth, with major financial burdens, facing increased unemployment and an economy in recession. So what can SA’s young professionals and students do to better manage their credit, and what do they need to know about building a solid credit record?
Good credit management
A credit profile is a track record of how you manage your loans and cards. Everyone who is a credit consumer — has a store card, a credit card, a bank loan and similar credit agreements — has one. A good credit score on your personal report demonstrates your responsible attitude towards these financial products, and may make it easier for you to get credit on good terms (such as a lower interest rate) or even access larger credit when the time is right – like when you want to enter the property market with a home loan, for example.
The flipside of this, however, is that a poor credit record — reflecting things like not paying on time, skipping payments or underpaying — might indicated to a creditor (like a bank) that you are a “risky” customer. They may choose to turn down your request for credit or offer you a higher interest rate to “cover” the perceived risk.
“The good news is that managing your credit profile is entirely up to you. If you pay on time, and manage your finances, your credit report and score will reflect this. You can also rehabilitate a “bad” score, by changing your ways and showing good credit management over time,” says Alison Magrath, executive director of the Credit Bureau Association (CBA).
“Take the first step by requesting your personal credit report from a credit bureau. You can get one free report from each of the bureaus that hold consumer information every year. If you space these out smartly, that’s five reports a year,” she adds. “Knowledge really is power in this case!”
It’s not just your credit standing at stake. According to the National Credit Amendment Act (NCAA), potential employers are entitled to request your consent to review your personal credit report if the job in question “requires trust and honesty and entails the handling of cash or finances”. This can be a stumbling block to employment for many different types of roles. Entrepreneurs also need a solid credit reputation, especially if they are “one man shops” or small start-ups where your personal credit status and your business finances are often intertwined.
Avoid the debt trap
Poor credit management can quickly spiral out of control. If you are hiding debts, or borrowing more credit to pay back other debts, you may soon find yourself in financial distress. This could result in a judgement against you or repossession of your assets. “It can be personally devastating to find yourself in this kind of situation, especially in your youth when you are still establishing yourself,” warns Alison.
She urges young credit consumers to empower themselves by getting their own credit reports and carefully checking them for any trouble spots (unpaid debts), or signs of identity fraud (accounts you didn’t apply for). “You can flag these issue or make a payment plan directly with the credit provider. They will send the new information to the credit bureau and your score will repair over time.”
If there is a ABC of good credit management, Alison says, it might be:
A – Ask for your personal credit report (know your credit status)
B – Budget. Budget. Budget. (don’t take on credit you can’t afford to service)
And – C – Cultivate good habits (live within your means, and pay your instalments on time and in full).
“It’s not rocket science, but it does take some attention, thought and diligence,” says Alison. “Take control of your finances now, and reap the rewards for decades to come.”
Credit Bureau Association