16 September 2022: When you apply for finance to purchase a big-ticket item such as a car, the one thing that will always get checked by the finance house is the status of your credit score. Your credit score is determined by your credit history and your ability to pay back loans on time. It can also affect the amount of credit a finance house will lend you, as well as the interest rate you will be offered on the repayment.
If you have recently graduated and are entering the workplace for the first time, a new or used car to get you mobile might be on your shopping list. However, you probably won’t yet have a credit history if you have not applied for finance, opened a credit card or retail store account card, or borrowed money, even if you are paying off a student loan. Living debt-free, especially in the current economic climate, is a good thing, but ironically it can also impact negatively on your credit score.
“Through our innovative Graduate Finance offering, WesBank knows all about guiding young professionals through the sometimes-complex task of vehicle ownership by simplifying the process. This includes assisting first-time car buyers who apply for vehicle finance but don’t have a credit score. For us, a credit history is not essential if you meet the relevant criteria,” says Kutlwano Mogatusi, Communication Specialist at WesBank Motor.
The relevant criteria include:
- Graduating with a degree or diploma obtained in the past three years
- Being under 31 years of age
- Being employed in a full-time job or have a letter of appointment to a full-time job that pays a minimum monthly salary of R10 000
- Being able to afford the monthly payments for your car
“In short, a good credit score means you are more likely to get a better deal on a bank loan. Having a poor credit score will indicate to the bank that you are potentially a high-risk customer, which may result in you being offered a higher-than-average interest rate on a loan or a limited loan amount. This is in the event that your loan application is approved,” says Mogatusi.
“If you are not approved for vehicle finance with your first application, it’s a good idea to review where your money is being spent before applying for another loan. You can also ask why your application was turned down. It could be budget related: you might not have enough free cash after paying off your monthly expenses, or it could be an affordability issue: you might not be able to afford the car you want right now, according to your income. Your car payment should not take up all your disposable income, as there are added costs when it comes to vehicle ownership.
“Using the WesBank online affordability calculator takes the stress and hassle out of this calculation, as we can let you know in an instant whether your pocket can afford the car you have your eye on. If it can, you are then in a good position to start the process of applying for finance to purchase your first car,” comments Mogatusi.
The best advice WesBank can offer is not to be too credit hungry – close accounts such as clothing accounts that are not essential, and only apply for credit when you are looking to buy a car or a house, for example. It will also reflect better on your credit record and credit score if you close those unused accounts.
So how do you build a good credit score if you haven’t applied for credit? The answer is simple, and there are a few ways you can do this.
Firstly, always pay your bills on time and pay at least the minimum amount owing. These could be your monthly electricity and water payments or a cell phone contract.
If you do have a retail store account card or a credit card, you can use these cards to make small purchases, but it is important to repay the minimum amount owing on each card at the end of the month. A credit card can help you build credit if you use it responsibly – it gives you the benefit to buy now and pay later, which demonstrates your ability to manage your debt versus income within your budget.
Opening a bank account and managing it effectively is also a good indicator of your financial responsibility, and this can also count towards establishing a good credit history.
While you need credit to build credit, it’s also important not to rush the process. Making several credit applications in a short period of time, for example, could do more harm than good for your credit building efforts, as it may appear that you are taking on too much debt.
“Building a good credit score will take time, but there’s no time like the present to start practising sound financial habits. These could help you reap the benefits of a healthy credit score in the future when you apply for credit products and potentially earn yourself a lower interest rate on a loan. Remember that a good credit rating can lead to more financial freedom and help you save money while achieving your life goals,” concludes Mogatusi.