What you need to know about credit as a young professional:

• What is a credit score?

  A credit score is an analysis of an individual’s credit history over the last two to three years. It is a calculation used by lenders to determine whether an applicant qualifies for credit or not, and at what rate, based on their spending history and what this indicates about their ability to repay monies lent to them.

• How do you build a good credit record?

  As a young adult, you should allow your credit record to develop organically. Don’t try to manipulate it by taking on extra credit you don’t need, and avoid taking on excessive amounts of debt just because you qualify for them. A good credit record is a reward for responsible financial management, and dependable payment of your debit orders month to month.

• What are good debts and bad debts?

  Good debt is affordable debt that can help you can reach your goals and objectives faster; produce greater value over the long-term, such as education or a home loan; or cover medical bills to improve your quality of life. Bad debt is debt that funds your lifestyle and doesn’t produce any long-term value.

• How does a bad credit rating affect you?

  A bad credit rating means lenders may be unwilling to provide credit to you, resulting in the loans you wish to take becoming unattainable. Should you still qualify for the credit, it will be provided at a higher interest rate, making it far more expensive for you to borrow money.

• What is a good credit score in South Africa?

  A good credit score in South Africa is between 650 and 669, while an excellent credit score is above 670.

• How do I improve my credit score?

  To improve your credit score, you’ll need to demonstrate sound financial management over a period of up to three years. This includes:

  • Avoid getting into arrears on any of your repayment obligations
  • If you have surplus funds at the end of the month, pay as much as you can into your existing loans, prioritising your short-term debt. This will also save you money by reducing the overall amount of interest you will pay
  • Be vigilant in tracking your finances and disciplined in how you spend them. Avoid buying luxury and expensive items on your credit card and using debt to maintain a lifestyle that your income cannot cover.

• What happens if you don’t have a good credit score?

  Your credit score helps lenders assess your credit worthiness. It shows how well you have paid back money you have borrowed in the past. When you try to borrow money again, lenders use your credit score to see how likely you are to pay them back.

  If you have a good credit score, it means you are responsible at paying back what you owe on time. But, if you have a poor credit score, it might mean you’re not trustworthy or dependable – and more likely to default on a loan or credit plan. This may present a measure of risk for potential lenders.

  When looking at your credit score to determine your risk as a borrower, they might be hesitant to lend you more money if you have a bad credit score because they're not sure you will pay it back.

• What is the impact of not having a credit score?

  In South Africa, authorised credit providers such as banks, micro-lenders,  certain retailers and credit unions may lend you money.

  The truth is that lenders look at many things like how much money you make, if you have a stable job, how many loans you have and, of course, your credit score.

  But, if you don't have any credit score yet, lenders have less information about how trustworthy you are. And because  they are taking a bigger risk, they might charge you more to borrow money. Sometimes they may refuse to issue you credit.

  If you are worried about starting and keeping a healthy credit score, you should talk to your bank about ways to build your credit score without borrowing too much money.