When used properly, credit is a helpful tool. When abused, however, it can lead to financial disaster.
The key to responsible credit management is only to borrow when you know you are able to repay the loan.
The way you use credit can influence your financial situation, and your ability to get other loans in future depends on responsible credit management.
Here are 9 tips for managing credit responsibly:
- Live within your means: This is the number one rule of successful personal finance, as well as credit management. Make sure that you can afford what you buy – even when you buy on credit. You want to be able to afford the loan payments, and before you buy anything on credit, consider if you will be able to pay it back.
- Track your spending: Keep track of where you spend your money. This way, you will be less likely to overdraw your account. It’s also a good idea to track your credit card spending separately so that you avoid exceeding your limit.
- Have a financial plan: Budgeting can help you pay your loans off responsibly, avoid having a high balance on your credit card and keep your debt at manageable levels.
- Make payments on time: If you miss payments, or habitually pay late, that will be reflected in your credit report and affect your credit score. With a lower credit score, credit providers could charge higher interest rates should they do decide to grant you a loan.
- Keep your debt level low: Try to keep your total debt payments less than 33% of your monthly income. If your debt-to-income ratio is too high, this could affect your credit score.
- Have different types of credit accounts: Instalment accounts like mortgages and vehicle loans show you can make fixed monthly payments on time over a long period. Revolving accounts like credit cards demonstrate that you can periodically pay down your debt, without going over your limit.
- Don’t close old accounts: A longer credit history can improve your credit score, and help you appear more responsible – especially if you’ve been paying them responsibly.
- Monitor your bank accounts: Monitor your bank accounts and credit accounts. Reconcile your statements regularly to make sure your records match those on the statements. You can also check your accounts online to spot fraudulent charges sooner.
- Check your credit report regularly and fix any errors: You are entitled to one free credit report every year from each bureau. Visit Compuscan’s www.mycreditcheck.co.za to view your account payment history, balances and instalments as well as adverse credit information. Make sure that there are no fraudulent accounts and that errors are fixed. If there has been fraudulent activity on an account, contact your credit provider and credit bureaus to notify them.