Most young individuals dream of reaching the big milestone of being young and independent.
Unfortunately, the majority of them have never received financial education at home or in school, and they have never taken a ‘’financial adulting’’ class, yet they are suddenly required to sign a lease, start a clothes account or get a credit card.
You might not have any credit accounts that you need to pay back if you're just starting out in the workforce.
The problem is that doing so effectively eliminates your credit history. The banking system won't allow you to access any credit if you don't have a credit rating.
It's a problem that is typically resolved by opening a small account with limited exposure or by asking a parent or close friend to act as your surety (guarantor) and agree to pay your debts if you make a mistake and fail to do so.
Even though it's not ideal, John Manyike, Head of Financial Education at Old Mutual, notes that it's frequently the only option to demonstrate your financial responsibility.
Even if you are eligible, Forbes claims that opening several store accounts is not the simplest approach to begin creating a credit profile.
It is preferable to start small and expand from there if you have recently started working and don't yet have a credit profile. If you are approved for a credit card, for instance, how you handle this credit will determine whether or not you have a strong credit history in the future.
According to Investec, in order to establish a solid credit history, you must manage your debt responsibly.
The key is to never deviate from the payment plan, pay on time every time, and refrain from overextending yourself by taking on too much debt since this will probably drag you down over time and hurt your credit rating.
As a young person, you have all the time in the world to create a solid reputation over time.
While your water and light bills won't appear on your credit report, Investec notes that your service providers will turn your account over to collection agencies if you don't make your payments on time. Your credit rating will suffer as a result.
Pay your invoices on time to prevent this. You can build a solid credit history by making on-time payments in the past, Manyike suggests.
Missed payments can remain on your credit report for six years, ruining your future ability to obtain good credit, such as a home loan.
Be aware of your credit utilisation rate; this is the percentage of your available credit that has been used out of your total available credit.
For instance, if you have a R10,000 credit limit and have only used R3,000, your credit utilisation is 30%.
Try your hardest to maintain it under 30% because it demonstrates that you are in charge of your money and increases your chances of getting credit later on when you truly need it for big purchases like a house. The less likely you are to obtain credit in the future, the greater your credit utilisation rate.
According to the Forbes Financial Council, there are a few points to remember when managing credit:
1. Recognizing that if an outstanding balance is not paid in full each month, it will accrue interest, which might be considerable. If you have a credit card, it is best to pay off the balance within 55 days to prevent paying interest.
2. Establishing a budget. You are not need to use the whole amount on your credit card. Ask the bank to lower the limit if you believe it would induce you to overspend.
3. If you always pay your card bills on time, a credit agency will award you a higher score. Your rating can suffer even if you pay a day late.
4. You can demonstrate that you can manage your finances and stay within your monthly spending cap by having available credit. In general, it's beneficial to your rating to aim for a spending limit that is roughly 30% lower than your limit.
The largest benefit, according to the African Bank, is that if you have a history of using credit cards responsibly, the credit bureau can use that as one of the best points of reference to determine your ability to manage debt.
Even if you must obtain credit to establish credit, you should go cautiously. Too many credit applications submitted in a short period of time could hurt rather than help your efforts to develop credit.
According to African Bank, this demonstrates to lenders that you are in a dire situation and may be prone to taking on excessive amounts of debt.
Card issuers enable customers to make a payment that is less than the full card balance. If you must do this, pay more than the minimum amount due because interest is charged on any unpaid balance.
Manyike indicates that a few bad months combined with the debt plus interest could lead to financial difficulties.
It might be challenging to choose a credit card because so many companies and institutions offer them. When applying for your first credit card, you should consider the terms and restrictions that apply to various card categories.
It always pays to read the fine print and comprehend: the costs associated with the card; the interest charges that apply for budget purchases and past-due payments; that there are restrictions if you want to use the card while travelling abroad; the card's validity period; and how frequently card limits and costs are reviewed.
When taking out credit, make sure to add credit insurance to protect against risks like layoffs, death, and incapacity because the unexpected can happen, recommends Forbes.
You are free to choose the cards. Online and in financial institutions, there are a ton of options.
Building a relationship with a service provider who can supply you with more services and solutions as your credit rating improves is crucial, but the most crucial lesson to learn should always be how to appropriately utilise credit, says Manyike in an official statement.