By: Ayanda Ndimande
Building a solid credit record from a young age is crucial for financial stability and future opportunities. Here are suggestions on how young individuals can establish and maintain a robust credit score right from the start.
Embarking on your financial journey
One of the most important life-steps a young person can take is to embark on their financial journey. This means choosing to take some of the lessons and learned behaviours from your childhood and letting go of others.
If you grew up in a household where finances were managed meticulously, you might find it easier to adopt similar habits. Conversely, if you observed a lot of overspending, you may not be familiar with a culture of caution and saving, so you might find it more difficult to make your salary stretch to the end of the month. You may need to consciously develop stricter financial disciplines. With a “clean credit slate” you can shape your money mindset and choose your path, with the right team on your side.
Building the right team
A key aspect of a successful financial journey is having the right support system. Young people need to surround themselves with a team of knowledgeable individuals who can provide guidance and support. Start by consulting those who are financially savvy and qualified to talk about finances. This could be a credit coach, adviser, or someone within the industry who can offer sound advice.
In today’s digital age, there is value to using online resources to gain financial literacy. If you are digitally savvy, platforms can provide valuable information and tools to help you understand how to build a positive relationship with credit from the get-go.
Practical steps to build credit
Starting with small, manageable credit options can help young people build their credit scores. Many young individuals begin with cell phone contracts or retail store accounts. These are understandable starting points, but it’s crucial to be vigilant about how you use and manage these accounts. Limit your spending to what you can afford to pay off each month to avoid falling into debt.
The role of credit cards
Credit cards can be a powerful tool for building credit when used responsibly. Credit cards can unlock a world of value and are excellent for building a credit score over time. The key is to understand how this revolving credit works and to consistently repay the funds used. They not only provide convenience but also help demonstrate your creditworthiness to future lenders.
Differentiating between good and bad credit
There is an importance to distinguishing between good and bad credit. Learn from the experiences of others around you and make informed decisions. Good credit is typically used for investments that will yield returns or appreciate in value, like education or a home. Bad credit, on the other hand, often results from impulsive spending on non-essential items.
Consistency is key
Building a robust credit record is a marathon, not a sprint. There isn't a specific timeline for establishing a good credit score. It's about consistent, responsible behaviour. It doesn’t matter what age or stage you’re in. Of course, it’s alright to stumble.
Life happens. However, having the right foundations in place – like emergency savings to act as a buffer should you be unemployed, for example – will help carry you through. It’s important to have a 360-degree view of your finances. Your credit score is just a snapshot of this, indicating your financial health in a particular moment in time.
Pitfalls to avoid
There are common pitfalls that can negatively impact a credit score. The biggest contributor to a poor credit score is not paying on time. If payments are consistently late or not made over more than three months, your score is going to feel this.
Credit utilisation – using over 40% of the credit available to you – also plays a big role. If you go over this, try to pay the funds back as soon as possible to move back into the acceptable utilisation of below 40%. Also, be wary of making too many credit applications as this raises questions of fraud. If you’re “shopping around” for a home loan, for example, try to stick to a limit of enquiring with three to six lenders in a three-month period.
Your name, your responsibility
One of the biggest credit issues seen with young people over the years is a person taking on credit for another individual. Ultimately, if you take out the loan, it’s your responsibility to pay it back, otherwise, your credit reputation is on the line.
By making informed decisions and surrounding yourself with knowledgeable financial advisers, you can build a strong foundation for your financial future. We offer free one-on-one credit coaches to help you embark on a positive credit journey, right from the start. We also provide you with a free monthly credit report, so you know exactly where you’re at and how to improve.
* Ndimande is the strategic business development manager at Sanlam Retail Credit.
PERSONAL FINANCE