A TransUnion study, released at the end of March, indicates that more than 27 million South African consumers have limited access to financial products and services.
How to access credit for the first time
This is owing to their lack of credit history, and makes it difficult for them to take up financial opportunities, such as home ownership.
This article explores how you can access credit products in the absence of a credit score, and which products are best suited to first-time credit users.
Tip: Paying off a personal loan diligently will help to improve your credit score. Find out more here.
From credit under-served to credit active
People who cannot access credit are at a financial disadvantage, says Ayanda Ndimande, strategic business development: retail credit at Sanlam.
“They have no credit history, have not been credit active, or have limited credit usage in their names,” Ndimande explains. “Not having a credit score can result in you not being able to access credit, or being exposed to expensive credit.”
Financial planner Sylvia Walker, author of Smartwoman: How to Gain Financial Independence and Create Wealth, notes that credit is even less likely to be given to those who earn cash only, or operate outside the formal employment sector. When traditional products, such as a credit card or store card, are out of reach, consumers are more likely to approach unlicensed credit providers, who typically charge excessive interest.
It is possible, however, to build up a credit score through access to restricted credit, says Ndimande.
“By paying off a short-term loan, you show you can be trusted with money and are able to repay it within a specific period of time. This helps you to build up creditworthiness and acquire a credit score.”
The advantages of a credit card
According to TransUnion, the most common initial credit products are clothing accounts and personal loans. However, according to Ndimande, the best first-time credit product is a credit card with limited credit availability.
“Good use of this product would entail spending wisely and paying back the monthly amounts on time,” she says.
“It’s important to stress the fact that improperly used credit can plunge you into a debt spiral, so be cautious and spend only what you’re capable of paying back.”
She adds that you don’t need multiple lines of credit to obtain a good credit score – in fact, using one product responsibly is key. “What matters is good management of credit, which includes using your card only when strictly necessary, and not overspending,” she notes.
Walker says your bank will likely offer you a credit card if you’ve shown you can manage your primary account responsibly. This will help you to start building a credit score.
Pitfalls to avoid when it comes to getting credit
Walker says a personal loan may not be the best choice for a first-time credit user if there is a revolving credit facility in place. This means you can borrow money while still paying off the amounts owing.
“Although this offers you flexibility, you will pay higher interest than you would on a traditional instalment loan. You also remain beholden to your creditor,” she says.
She adds that a clothing account can work well if you buy something small on the account and pay it off quickly. “Do this a few times to build up a creditworthy record,” she says.
“However, don’t fall into the trap of maxing out your card and buying items you weren’t planning to buy because they’ve caught your eye in the store.”
Walker recommends keeping your credit utilisation under 50% – that is, less than half of the amount available to you. “Ideally, it should be at no more than 30%,” she says, adding that you should be cautious about easy credit if you are tempted to spend.
Tip: Help is at hand if you have gotten into debt. Find out more about debt consolidation here.