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18 Jan 2015

KEEP A HIGH CREDIT SCORE

I will later give you a more detailed update on what had filled my hands for the past few days. One being the intense marketing of a property which found a tenant today and the other being lots of lay houseplan designing and architect briefings I have been drawing for the upcoming apartments project. For today we are looking at how and why we need to keep a high credit score...or NOT.

It is quite scary how we plan on being indebted ALL the time. This dependency on debt, be it good or bad debt, is what necessitates the healthy credit ratings. I am the first to admit that I have plans to get into debt in future to acquire assets that I can easily invest in with credit. Each time I act on those plans, the financial service provider (prospective lender) will look into my current and past relationship with money. This historical relationship determines how well I am likely to pay back whatever credit I want the lender to grant me. My personal finance historical data is continuously collected, stored and analysed by credit bureaus and distributed to lenders on request. This is a pretty smooth and sophisticated process that analyses both your positive and negative money decisions.

Let us now take a closer look at how those money decisions affect your credit rating:
  • Credit history
The lenders use your credit payment records to assess how bad a credit risk you are. These records are made available by your previous financial service providers. Each time one gets credit, the records are kept as reference for future credit requests. The credit payment history carries the biggest weight of all determinants of your credit scoring. NB: You have to pay your debt within an agreed period consistently.

  • Existing debt
This is the second most important determining factor of one's credit rating. Reducing debt can help increase one's credit score. That is of course when one has quite a bit of debt.
  • Length of credit history
The new entrants in the credit game are usually viewed as high risk. This automatically reduces their credit ratings. The same goes for those who stay away from credit for long periods of time. One needs to use credit every once in a while to keep a high credit score. You will see my soapy story below.
  • Type of credit
A credit card is one of the debts that are well recognised. Meaning that, keeping a credit card that is used responsibly can help boost one's credit score. The rest of the cards should also be used and paid for within the agreed time frames. It is important to actually get only the credit you will use.  
  • How frequent one applies for new credit
Applying for credit frequently is perceived as a high risk factor. Each time you apply for new credit, prospective lenders request your credit report from credit bureaus. Too much requests of your credit report by lenders may affect your credit score negatively. This is seldom the case though.

Flaws in Keeping a High Credit Score

Since the credit rating is based on debt, you need to have some debt to maintain a good score. When you have no debt or history thereof, you don't get to be appraised as a disciplined consumer. What a shocker!

This also shocked me in 2013 when we were applying for a new homeloan/ mortgage. We had applied for this kind of credit a number of times before. The only difference was that, at this point we had no debt at all. We had paid up the last homeloan we had and decided to take a break from debt of all kinds. I could not believe my ears when the bond originator lady explained to me that we do not have a good credit rating. The thought of being scammed crossed my mind. The explanation I got was that, when you don't have debt, lenders are never certain of how well you would handle credit. I really laughed at the caller's ear in disbelief. The best that we could be approved for was loans on prime interest rates, with one bank going above prime.

As the saying goes, "desperate times call for desperate measures", we sought a different plan of action. We applied for a readvance on two of our old mortgages (paid fully but still open accounts). Being granted a readvance is an act of withdrawing funds from one's existing homeloan. A home owner may apply to access the funds they have paid on their mortgage. This also helps them to access the funds they paid at an original interest they were charged. This was a huge positive for us as these existing bonds were cheaper debt at prime interest rates minus 2 and prime minus 1.8 percentages. Though we seemed to have gotten lucky at the end, we never missed on the lesson.

We have since tried to rectify that by taking on some debt like it is expected of "normal" human beings. We have always had cellphone contracts which do not seem to help. The Mr now carries a credit card. We have two store cards that we use more often than we ever thought possible for crazy people like us. If we were sure we would never need a homeloan again, we would not even bother with trying to keep a high credit score. It is a fact that we only need to keep a high credit rating to get into debt like applying for a credit card, personal loan or mortgage. OK, we now have to stop demonising debt like carrying a credit card. 

Another lesson was that of not closing the fully paid mortgages. Getting an access bond may be an even better solution. The readvance application was the most difficult process I ever had to go through with the banks.  

Final Words on Building your Credit Score
Get a little into debt. I think a credit card is much safer when well handled.
Use your credit card or whatever credit you applied for just a bit.
Pay your debt on time or earlier than the set date.
Open all the bills that come via the post and email. It is so easy to miss on some debt that is lying in sealed envelopes.
If you happen to have overdue bills, talk to your service provider to make arrangements that suit your financial situation.
Do not max the credit you are offered.
Rather use the credit card for your purchases and pay the debt up within the 55 interest free days.
Do check your credit report. I get my free one annually from Trans Union.

I will respond to the emails I received this week. Please exercise a bit of patience. I really love hearing from you. Leave a comment below or email me via the "contact us" form below.
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4 comments:

  1. Thanks for the valuable and informative post. I just want to know if the retired people can be given chance to open accounts i.e good debt in order to get loan?

    ReplyDelete
  2. Hi Reginah,
    I think that depends on whether the retired person in question has enough monthly income to repay the loan. The lender gives credit based on the current status of the applicant and not on the future.
    If for instance you want to buy a rental unit, the lender wants you to be able to repay the mortgage before you start collecting the rentals.

    ReplyDelete
  3. Good Evenning Mbini
    Thank you for the information its such an eye opener.
    I had a bad credit record for some time until I draw up a payment plan .All my debts are paid up now and updated on credit beaurow.I do have one credit card which is also paid up but not closed I am paying only for monthly charges.I'm now at that stage where I need a house for my kids.
    Do I stand a chance to get 100% bond with my credit history?
    Will the bank consider me as a high risk?
    Which one is better to apply for a bond through estate agent or through the bank

    ReplyDelete
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