Most South Africans are over-indebted, so living without debt may sound idyllic. However, it can cause problems when you apply for vehicle finance. We help you understand when this scenario may apply to you and how you could fix the problem.
You might live debt-free because you chose this lifestyle or, possibly, you are one of those people (like students or graduates, who are just starting out their careers) who are living without debt because they’re so young they haven’t begun to buy big-ticket items like houses and cars.
For whatever reason you’re living virtually debt-free, if you plan on buying a house or a car in the near future and can’t afford to buy them with funds you already have, you’re going to need a good credit score if you hope to secure finance to reach those goals. It’s important for a car finance provider to see a history of how you have successfully managed debt.
Your credit score is calculated based on your credit history. If you have never borrowed, which is especially true of younger people, then you will not have much credit history – or a “thin file”, which means your score will be lower. It may even be that the credit bureau can’t generate a score for you at all in this case.
Also read: How to get a good credit score
So how do you know if this has happened to you?
There are companies that will show you your credit profile for free and provide some useful information about what that score will mean when you apply for different types of credit.
If your score is less than 500 and you know that you have little or no credit then this is the first sign of a problem.
A “thin file” can be very frustrating because you might feel that you’re put at a disadvantage even though you clearly can afford the vehicle that you want to buy … and have not done anything wrong. There is no point complaining about the stupidity of the system, nobody will listen! You are actually a dream customer, but you need to build your credit score.
Bad credit score? Have you considered a pre-paid car plan?
So how do you start building your credit rating from the ground up?
You need to build a credit history, which means you have to take out some “credit” and then pay it off. This demonstrates to the vehicle finance provider that you can service debt in a responsible manner. This does not mean taking on a lot of debt (we list a few ideas below). If you do one or more of these, it is likely that, in 3 to 6 months’ time, you will have built a score that will provide access to car finance.
Tips to build a credit score:
- Open a bank account and ask for an overdraft facility. Don’t use more than 25% of the available overdraft limit and pay what you owe quickly.
- Get a credit card or even a retail store card. Use this card or account to make small purchases and repay the money at the end of the month. Remember to pay it back in a timely manner and keep your credit balance below 35% of your credit limit.
- Go slow with credit applications – while you need credit to build credit, it’s important to take it slow at first. Having too many credit applications in a short period of time might do more harm than good for your credit-building efforts. This shows lenders that you’re desperate and could be susceptible to getting in way over your head with debt.
- Monitor your credit report so you can keep track of progress.
Need a quick solution?
If you can’t secure a finance agreement because you have no credit rating, consider car subscription services such as Flexclub, which are much more likely to help you acquire your new wheels.
Learn more: Rent-to-own financing
