Qualifying for credit is a lengthy process that most people are often unprepared for. In most cases, this is because of the lack of understanding of what is required when applying for credit. The key requirement in acquiring credit is credit history. But first, what exactly is credit?
Credit can mean a lot of different things to different people. But the standard definition of credit is a contractual agreement between a borrower and a lender, where a borrower receives a valuable asset now and pays it back to the lender at a later date. Credit can also be defined as a deduction of money owed to a lender or the amount that a consumer or business has available to lend.
The CEO of Bayport Financial Services, Alfred Ramosedi explains credit as something that we can access to fulfill our aspirations which do not fit into our budgets. “Credit is assistance; it is the help that allows you to make your plans possible.”
In this article, we will discuss why you may need credit, the role of credit history in the process of acquiring credit, and further discuss whether you can get credit without a credit history. We’ll also discuss whether it’s possible to live without credit.
Why do you need credit?
Having credit allows you access to more credit. For example, if you need a home loan or business loan, you need proof of credit history. If you do not have an existing credit history, it becomes difficult for lenders to give you money. Credit history is a means used by credit providers to assess your trustworthiness. It tells the lender that you have borrowed before and paid back without any problems. The absence of credit history makes it difficult for creditors to determine their trust in you. On the other hand, when you do have a credit history, you have the opportunity to access more credit for valuable things you might need but do not have the money upfront for them. When credit is used correctly, it can help you maintain financial flexibility as well as assist you to acquire good assets. Good credit can help you save money, be able to assist you in an emergency, and most importantly, and opens the door to financial possibilities.
However, the CEO of YES, Tashmia Ismail-Saville doesn’t believe that credit is always the right solution to financial needs. She explains that credit is often not given to consumers for productive aspects. “People are using credit for consumption and are given high-interest rates which are hard to repay.” She explains that her work in townships and poor settlements has exposed her to the realities of people who find themselves in vicious credit cycles. “They take out a loan to pay off another loan. The interest rates are high and the cycle makes it impossible to get out of debt,” she adds.
How do you qualify for credit?
According to Ramosedi, to qualify for the credit; “you need to be able to convince the person giving you the credit that you will be able to pay them back. You need to be able to gain their trust and that is usually based on your past behaviour.” That’s where credit history comes into play. It shows the lender your paying behaviour, which ultimately helps them decide whether to grant you the credit or not.
So then, can you get credit without credit history? The simple and short answer is, it depends on the lender. When you have no credit history, it simply means that you have not borrowed any money from any formal lender. In cases such as this one, it becomes difficult for lenders to give you a loan as there is no history. Ramosedi suggests two ways in which you can gain lenders’ trust:
- Pay a deposit towards the amount that you are applying for. This shows commitment and also shows that you are also willing to incur some of the risks.
- Start building a credit score by applying for small credit which you can pay off quickly, such as a bank card, credit card, or a store account. This will help you build a credit history, especially if you make all your payments on time. But remember that this should be good credit, not just luxury items or things that you will consume. You should buy something that you will still remember in six months. Aim for amounts between R5 000 and R 10 000.
Credit dos and don’ts
When you have qualified and obtained the credit, you have to be mindful of how you use it. Follow these dos and don’ts as guidelines:
- Do – maintain good credit behaviour. When you take a loan, make sure that you can pay it back.
- Do – avoid common mistakes that people often make, such as using credit to purchase things that you should fit into your budget.
- Don’t – skip payments as that will have a bad impact on your overall credit score.
- Don’t – take a loan to pay another loan.
The bottom line
Overall, it’s clear that credit history plays a huge role in the process of acquiring credit. Ramosedi believes that no one can live without credit. “No one can live without good credit. The real amount of money you have in your pocket will never really cover everything because of inflation. The reality is people will always need help.”
On the other hand, Ismail-Saville suggests that it may be possible to live without credit. But that involves a lot of saving and patience. For example, if you are building a house “do it in a modular fashion, have a 5-year plan, and determine which model you will go with. If you have a business plan you should keep reinvesting your money and not spend it.”
Ismail-Saville adds that to make credit more viable as a financial planning option, we need more behavioural work to be done. “We need to experiment with better ways of determining risk. This will allow for better repayment and better interest rates. With the current ways, if your risk is high your interest is high. There is a need for a better tool.”
“In South Africa, it is not easy for people to get credit. But there are credit platforms that are looking to use behavioural mechanisms like getting credit over text messages and even using your phone to determine your buying behaviour. An example of this type of innovation can be found in Kenya where CBA (Commercial Bank of Africa) is looking at savings behaviour and savings rates to screen people for credit.”
While we wait for South Africa to seek and implement further innovative approaches to credit, as the borrower, you have to decide whether you want to live with or without credit. It’s an individual decision that is dependent on your needs, your financial standing, and the capability of making payments to lenders. The recommendation would be to speak to an expert who can guide and support you through this process.
