When you come of age, you will find that you have a credit score. However, you don’t automatically receive a good credit score. Rather, you will receive a credit score of zero. This isn’t as bad as having a bad credit score, but it’s certainly not going to make creditors favour you either.
The only way that you can build your score is to apply for credit and maintain it well. This begs the question: should you take out debt to help you build your credit score? We answer this question, and we look at compromises you can make.
Tip: If you’re struggling to manage your debt, sign up for debt counselling for help.
Credit to build your credit score - what could go wrong?
Annelene Dippenaar, chief legal and compliance officer at Experian South Africa, explains that your payment history is one of the key factors that contributes to your credit score.
This means that you’re somewhat encouraged to go into debt – even if this means just opening a small account. However, Dippenaar points out that this can backfire and she cautions against the following.
- Taking credit for the wrong reason: Taking out credit for the wrong reason is the first step in using credit to obtain luxuries you can't afford. Failure to budget correctly could also cause you to take out small loans to cover what your salary can’t cover. Rather budget effectively than end up in a debt spiral.
- Not being able to afford the credit or the repayments: Credit costs money. You might think you're borrowing R1,000, but you also need to pay the admin costs, insurance and interest. These all add up to the total cost of the credit.
- Defaulting on agreements: If you cannot satisfy the terms of the agreement, and you skip payments or stop paying completely, there will be serious consequences. These include, potentially, having a court order or judgment taken out against you.
Open small, interest-free accounts
Dippenaar believes that a good starting point to build your credit score is small functional accounts, such as a cellphone or data package account with a telecommunications company, or insurance.
“A limited credit account, such as a retail account that’s offered with no interest, is also worthwhile to consider when trying to build a credit history,” says Dippenaar.
She adds that this can help you in your day-to-day life, but will also reflect as a record on your credit report.
“Whilst these accounts do not hold the most weighting in terms of scoring, they are a good starting point to get your foot in the credit door and ease the way for future applications,” says Dippenaar.
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