Understanding the importance of a good credit rating
What you need to know about credit ratings
Buying a car, especially your first car is an awesome experience. In addition to being a status symbol for many South Africans a reliable car is a vital mobility tool in South Africa, where public transport is very often erratic and unsafe.
This makes owning a car a necessity for many South Africans, from students to those starting a career as well as anybody who needs to travel to work or transport their children to school. Buying a car is a significant financial commitment and one of the biggest purchases that people will ever make, which is why most South Africans will rely on the services of a financial services provider to finance their vehicle.
Banks and financial service providers use a variety of methods to determine whether individuals qualify for vehicle financing assistance. These methods are based on risk and affordability and an individual’s credit record and credit score are one of the most popular barometers of these factors.
Your credit record refers to your entire credit history, including all the credit transactions you have ever concluded with a registered financial services provider.
Your credit score is affected by your credit record and your reliability when it comes to paying back loans on time.
These two factors will be used by banks to determine how much credit you can be given and the related interest rate that will be charged.
Establishing a credit record or credit score can only be done by applying for credit. One of the most popular ways of starting out on this journey is via an account at a retail store. However, poor finance management can very easily see this account turn into a source of bad credit and do more harm than good for those looking to establish a good credit score.
Establishing a relationship with a financial institution is always a good starting point and the opening of a credit card can be a useful first step towards establishing a credit record. Credit cards allow you to buy now and pay later and when used responsibly by meeting the required monthly payments, a credit card can be a useful tool in building a positive credit record.
Once established, there are a number of ways to maintain your credit score or improve it. These include paying on time every month, as even paying a few days late can have an effect on your credit score. Reducing the amount you owe is a great way to improve your credit score and that is best done by paying off the loans with the highest interest rate first. Where possible avoid revolving debt such as credit cards and avoid applying for unnecessary additional loans or extra credit cards as this could lower your credit score.
Remember that outstanding debt will stay on your record, so if an account is overdue it will negatively affect your score and making some payments or paying it off won’t clear your credit record but will improve it. Information about your payment profile can stay on your record for up to five years.
When thinking about buying a car it is important to be honest with yourself and only shop for a car that suits your needs and budget. Saving up for a deposit will also assist greatly in reducing your monthly premiums and getting finance approval.
A well-managed vehicle loan agreement will also count as a valuable reference in future when you need to finance other big-ticket items like a new car or a house so it is best to buy what you can afford rather than over extend yourself and end up in a bad credit situation.
When calculating your monthly budget, it is important to keep other running costs associated with owning a car in mind. Apart from the monthly repayments you will need to budget for insurance, fuel and maintenance.
Car finance calculators are a great way of finding out exactly how much a particular car will cost on a monthly basis allowing shoppers to refine their search to cars that meet their budget.