One of my biggest financial challenges that was preventing me from growing was a horrible credit record. In my early 20's I really messed up when it came to credit. Wonga , Telkom, FNB and other short-term lenders knew very well. It got a point where I just had debts that I couldn't explain. I eventually climbed out the hole, in this post I am going to be sharing the methods I used to rebuilt my credit record.
How I went wrong?
I will spare you the long story but suffice to say I messed up because I wanted to live beyond my means. My desires were uncontrollable and they resulted in me spending money that I did not have. This is where most of us go wrong, we want clothes, trips, expensive cellphones, etc and so get credit to afford these things. We then fail to handle the credit properly and then sooner or later.. we in trouble. Looking back I would say I messed up by not having a plan for my credit usage. When I started getting loans and credit cards it was because I had a good credit record and income, lenders were willing to take a chance on me but then I let everything fall apart.. so you have to..
Set a Credit Score Goal
Right now as you read this, Do you know your Credit Score and Credit Record? These are very important things to know. Knowing this information will enable you gauge how your financial performance is going. These are the things I did not focus on. I did not check the numbers and keep track of my situation. So when things looked bad I was surprised by how bad. Had I kept track of my record I would have known that I am messing up sooner and maybe started changing things.
The change I made was to set a clear credit score goal. I wanted to achieve a rating of 750. The first thing I did was to find out where I was, I discovered I was at 520 (very bad). I looked at the loans I had, missed payment history etc. And so I started paying down my debts and consistently. It took 3 years to pay off everything. After I paid off my debts my score had improved only to above 600. I think this was because I was sometimes not consistent and also paying the minimum in some cases. But at least I was debt free..
This meant the real work could begin.
What is a Credit Score? (And why is it important?)
A credit score and credit history is a data sheet used by lenders to observe your payment patterns and history. This enable lenders to judge the risk you pose on their finances. Basically it is a system that lenders that "this guy pays back his debts the way it is agreed upon, you can trust him" or "this guys does not pay back his debts as promised, do not trust him". So it is a way to measure how trustworthy you are when it comes to your debts.
Nobody would lend money to someone who has shown that they cannot be trusted to pay it back as agreed.
Working on credit score is important because if you want borrow large amounts of money to build a business, buy a business, buy a property or any other asset. So credit is the key to wealth building for most people. Thus it is important you work on yours.
Here are the methods I used to improve mine. Please note that these methods will not work if you are already deep in debt. These methods will work for someone who has managed to pay back their debts and qualifies for little amounts of credit. To check this, I would say use resources like Experien, Trans-union, your bank or any other lender to do a comprehensive check on your credit record.
What I did to rebuild my score?
The Personal Loan trick
The number one thing that helped me was using personal loans. I started out by taking out a R3000 personal loan. I used the money from the personal loan to pay back the loan and used my own money to cover the other fees (initiation fees, interest and admin). The loan was a 12 month loan but I paid it back in 3 months. (this was from FNB). I then took out another loan a few months later, this time for R7000 and paid it back the same way. (and yes, the fees hurt, I was paying between 18% to 24% interest). I repeated this process and the amounts I qualified for kept getting bigger and bigger. Seeing the bank also make me offers on my banking app told me I was headed for the right direction. I managed to get my score up to 650 using this method.
(side note: join me for a Master Class called "Get Paid Dividends". Tickets cost R99)
The Store Credit Card Trick
The second method I used was a Truworths credit card, it started out with a R2000 credit limit. The thing I would do is I would buy clothes that i had budgeted for using my credit card and then pay Truworths the amount into my credit card. After a year this got my credit limit lifted to R5000 and after 3 years it got lifted to R8000. I eventually closed this account as having credit available to use at anytime can make you seem like a risky borrower. However combined with the personal loan tactic this increased my credit score to a 700 and sometimes 720.
The income trick
Here is something important..
Your income also has to be increasing or expenses decreasing in order for you to be perceived as a person who passes the "affordability test". The amount of credit you can get is essentially based on how much disposable income you have available. Thus your disposable income has to be increasing over the years as well. So the one other thing I did was work on my income. This is the hard part as not everyone can control this but this is where things really matter. Even if you pay back all your loans on time and are a trusted borrower, you cannot be given a R1 Million in credit without the correct affordability level.
How long did it take to get my credit score up?
I wish I could tell you it took a year however it really took me 5 years to go from 550 to a 750 rating. It takes time to clear bad debts and get them removed from your credit report, plus it also takes time to get new data about you updated, then it takes time for you to grow your income and improve your affordability. So expect this to take time, but just because it will take time does not mean it is something not worth doing. 5 years later you will look back with happiness when your bank is always asking you if you like that half a million loan... your job is then just searching for opportunities that will make you money by using the banks money.
Final Thoughts...
These days I protect my credit score, I do not take credit that is not effectively used to grow myself or business. And I guess that was my old mistake, I always took out credit to consume. I did not realizing I was borrowing from my future self, I was not just borrowing money, I was also taking time and any future opportunities. A lot of businesses I wanted to try could not work out because I could not get credit to finance them, even grant applications for funding sometimes require you to have a solid credit score, so a lot of opportunities were missed. Thus think twice before you borrow money or swipe your credit card.
Happy Investing
- Omega
Remember: Opinions expressed in this article do not and never will constitute financial advice. Every person's financial situation is different, I recommend you speak to a financial adviser about yours.
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