How to be smart with credit

Credit is there to help when you cannot afford something, but you should always be smart when using it to ensure that it remains your friend and does not become your enemy.

Ayanda Ndimande, strategic business development manager for retail credit at Sanlam, says smart credit habits can save you a significant sum of money over time and support your financial health.

“Credit is a natural and necessary part of our financial lives. The trick is to get smart about it and to take control to ensure credit serves our interests and our future, not the other way around. Now’s the time to build your credit confidence.”

She suggests these five strategies to guide you to smarter credit habits:

Understand your credit report

Your credit report is the foundation of your credit score and can influence your ability to secure loans, mortgages and even rental agreements, Ndimande says.

“By law South Africans are entitled to one free credit report each year. Take time to review it thoroughly and look out for inaccuracies. If you find any discrepancies, dispute them promptly. Understanding the specifics of your credit report empowers you to address issues that could negatively affect your score.”

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Know your credit score

If you regularly monitor your credit score, it will help you to understand your financial health on an ongoing basis. Apart from your ability to access one free comprehensive credit report per year, many banks and companies give you free access to your credit score and often also support your understanding with tools that explain why a credit score is what it is, she says.

“A score above 600 is generally considered good, but knowing where you stand is just the beginning. Familiarise yourself with how your score is calculated based on your payment history, credit use, length of your credit history, types of credit used and new credit inquiries. There is a solid formula for your score, which means there is a “formula” to improve it as well.”

Ndimande says if you can practice good financial habits like paying your debt on time, diversifying your mix of credit to show that you can pay different kinds of debt on time and not maxing out your credit limit each month, for example, you can immediately start to make strides on improving your score. “The longer you can build up a good credit history, the better.”

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Create a budget and financial goals

“Creating a solid and sensible budget not only helps manage your expenses but also enables you to plan for your financial future. Track how much you earn and how much you spend to see where you can cut costs. This can help you to allocate more money to pay down expensive debt with high-interest rates.”

Ndimande says some people use the ‘snowball’ approach to pay off smaller debts first to free up funds to pay down the next smallest debts and so on. “Make sure you have clear financial goals, whether it is saving for a down payment on a property or paying off credit cards within a specific timeframe.

“If you know where you are heading with your finances, you can make strategic choices to help you become more creditworthy. “

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Use credit responsibly

If you want a healthy credit profile, you must use credit responsibly, Ndimande says. “Try to keep the amount of credit you use below 30% of your available limit, because the more credit you use, the more it can negatively affect your credit score.

“And if you want to avoid more interest changes and late payment fees, try and pay whatever balance you owe in full each month. This habit will not only improve your score but will help you to create a positive credit history.”

She says it also helps if you know what you can afford before you apply for credit. Do the homework by reviewing your bank statements and do the math to understand what effect a monthly repayment will have on your current budget. 

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Know the difference between good and bad

Good credit brings you positive results now and in the future, while bad credit stretches you financially without getting you closer to your goals, Ndimande says.

“Spot the difference and use credit as part of your ‘big picture’ financial plan to move closer to your life milestones. And before you sign for credit, always read the fine print, to ensure you understand exactly what you are getting into.

“Remember that buying on credit hardly ever means you are just paying the price you see. Credit costs money, and you are likely to have to pay fees and interest rates and there will be default terms. As a borrower, you are also often able to negotiate the terms of your credit plan. Do that if you can.”