Slowly but surely the South African consumer is becoming more aware that a healthy credit rating can be very useful when it comes to securing a line of credit. One of the rumours that instigated this snowball effect was that it used to be fairly expensive and confusing to know where to access your credit report. And what is the best way to manage credit? Like any trend, it’s difficult to pinpoint exactly where this all started. Myths can have a big impact on consumers and the way they go about their daily spending habits. One of the major myths that act as a major influencer is how you manage credit cards, with the most common form being consumer debt. There are four major credit card myths that continually rear their heads and need to be extinguished yesterday. They really can have a negative impact on your credit.
Carrying a balance helps your credit score
The myth around carrying a balance improves your score is too often told. The truth is you don’t need to pay a single penny of interest to have an excellent score. What’s even worse is that carrying a balance could have a detrimental effect on how potential creditors view you. It’s advisable to keep your credit card utilisation rate (the amount of your credit limit being used) under 30%. Looking at data from Experian and TransUnion across South Africa in 2015, consumers who are active credit users with a utilisation rate between 1-10% had the highest average credit scores – with scores falling the closer you get to 100%. Lenders want to see sensible consumers and if you’re stretching yourself too far, they may see you as high risk and be more reluctant to lend. Using your credit cards wisely and paying the balance off each month will do you wonders for your score.
Missing a payment isn’t an issue
One of the most common ways people hurt their credit score is by making a late payment. Being more than 30 days late on just one repayment can really hurt your score and late payments can fester around your report for up to 5-7 years. The premise of having a credit rating is so that prospective lenders can assess how likely you are to make your payments on-time and settle your debt. Your one-time payment percentage is a crucial factor in predicting that. Always do your best to make sure that you don’t miss a payment, do this by staying in control of your spending habits and enforce regular payments, this way you won’t forget to make a payment and you’ll avoid unnecessary penalty fees.
Close the cards you don’t use
It’s fine to keep a credit card account open that you don’t use, although it’s also a little dangerous as there lies temptation. The more accounts that you have open as ‘active’ means a higher overall credit limit, and the opportunity for unnecessary spending. This could also result in a lower credit card usage rate, which credit score models take into account. Be careful that if you do close off an account and carry on your rate of spending, your credit utilisation will increase and your score may well fall. Closing a card may also lower the average age of your combined accounts. It’s not necessarily a big factor on your score as utilisation rates, but some credit scoring models only look at active and open accounts when calculating the average age of accounts and incidentally your score can suffer, especially if you close a card that’s far older than others.
Being an authorised user on another person’s card has no impact
This is always a little risky as you are not legally responsible for another person’s debt although your credit score can be impacted as a result. Either way, a credit bureau will view it as if the cards were your own. These cards can add years of positive credit to your report but in hindsight, if the primary account holder defaults or misses a payment, you will both bare the brunt. In tandem with this, if they have a high credit card utilisation rate, you may fall under the same bracket. For many, being an authorised user on someone’s account is seen as a segue to healthier credit, but in the wrong scenario, it can have the reverse result.