Do I have to make debt to get a good credit score?

Should you create Debt?One of the ironies about credit is that if you do not have any, it is difficult to get.

When you apply for a loan, for finance or any kind of credit, the company you are hoping to provide the credit will do a check on your credit history. They will request a report from one of the South African credit bureaus to determine your credit worthiness.

If you have not had any accounts in the past, or only one or two fairly new ones, they will not be able to provide any details on your history as you simply do not have one. While it is great to pay for everything cash and not have debts, it does make life difficult when you do need access to credit.

Credit checks are also done when you apply for a cell phone contract and often when you want to rent a property.

Even if you are very anti-debt, there will invariably come a time in your life when you will need some form of financing or credit. Home loans and vehicle finance are two prime examples. It is important therefore to have a few accounts, pay them well and establish a good credit score.

Also remember that your credit score can improve the interest rate you will be offered. This is another very important reason to develop a good credit history. An interest rate that is 0.5 or 1% lower will add up to a sizeable amount of money over the term of the loan, particularly with a bond.

If you have a bank account in good standing that has been going for some time and into which your salary is paid every month, most banks will be happy to give you a credit card. They will normally start with a relatively low limit which will increase over time. All you have to do is use it responsibly.

You can always make your purchase on your credit card instead of a debit card. If you pay the full amount outstanding every month, you will not incur any interest charges. The other great benefit of this is that many credit cards offer great incentives or loyalty programmes which could pay for your next holiday or some special treat for the family.

Many of the larger, national retailers are rather flexible and will give you a small amount of credit based on three months payslips and ID. Again, they will gradually increase the amount of credit over time. You do not have to use all this credit but use the card in stead of cash and pay the full balance every month in order to start building a good credit history.

Six months of good payments are generally enough to start establishing a fair favourable credit history.

Some institution will ask those with no credit history to get someone to co-sign the loan. Although this is unpleasant, it will probably only have to be done once. After paying that account correctly for some time, you will be able to establish a good history and the next time you apply you should be in a better position.

Do not leave it to the last minute. If you find your dream home and want to apply for a loan, a lack of credit history will make this very tricky. Open one or two accounts and get a credit card. Just use it prudently and pay the correct amount as soon as it is due. Before too long, you will have a very healthy score and you will not be in any major debt as a result.