Credit means different things to different people – it could be good, bad, or ugly; and a lot of times, how it looks depends on how it was managed. For some entrepreneurs, the acquisition of credit marks a defining moment in their business, while it marks the source of troubles for others. Let’s talk about credit. The advantage of credit is that it comes in handy when you need to meet those unforeseen circumstances that come along in life and business. It is not an ill, although it could well become one in unprepared and incompetent hands.
Contrary to popular opinion too, credit is always available because lenders make enormous returns from lending to you. But the conditions of borrowing sometimes tend towards suicidal, so watch it! Oh yeah, we know cash is King and all that. Say NO to credit if you can, but why pay cash if you can borrow at reasonable terms? Any astute business man would go for the credit.
The risk is real and you must manage it as a borrower. In the very least, you have a responsibility to think really hard about why you need credit, who you can approach and how you can avoid becoming a defaulter or being penalised while utilising the credit. Those penalties can be really harsh too.
It is ironic, but the more you borrow, the better your credit score. Your credit profile reflects who you are, and if you have previously mismanaged a credit line, you would have a bad credit score. Now, getting credit with a bad credit score is still possible, it may just be a tad harder.
Here are 5 top tips to scale you through your credit sojourn without getting burned:
Maxing out your credit limit is a No-No.
Creditors expect you to stay within a borrowing threshold that is within the agreed limit. Remember though, that the more money you borrow, the more money your lender makes. As a result, your agreed limit is calculated based on your perceived level of spending regardless of how much you’ve requested for. So watch it. It is important that you earn the trust of your lender. Smart borrowers never go near their credit limits; about 30% or less of what you actually can borrow is a good rule of thumb and a great way to reassure lenders that you’re reliable and responsible with credit. Avoid maxing out your credit cards. When you max out or even go near your credit limits, it could mean one of two things – a) You need more money, which is a risk trigger to your lender, and b) You are struggling to stay within limit, which is also a risk trigger. Some lenders can in that instance pre-agree to extend your limit further, which could be a saving grace. But you just try your best to not reach or breach that limit, because if you do, it drags your credit score down exponentially.
Budget, Budget, Budget
Not to sound like a broken record, but this in actual fact is the holy grail of managing money. It cannot be emphasised enough. Try to work out a practical estimate of what you’ll need, what you can afford and to what extent your borrowing fits within the budget plan. Try as much as possible to get close to the numbers in practical terms. For one, master your bottom line numbers e.g. know that you need 50K for household expenses monthly; and then use budgeting tools online like the icomparemoney Budget Planner to simplify things.
Guard your credit profile jealously
While some online credit agencies / bureaus will give you instant and free information about your credit status, others would not. Your credit report provides details of your credit history and you would be able to rectify any incorrect information being held on file. It would also give you insights into what directly impacts your credit profile. 38% of people who check their credit report find out that wrong information is being held on their file. This is why you should guard your report jealously, check frequently and flag any incorrect data. In the UK, Experian, Callcredit and Equifax charge a monthly fee while Clearscore offers free credit reports. There are a few credit agencies springing up in Africa, and of course in Nigeria, we have the XDS Credit Bureau, CRC credit bureau, and the Credit Registry.
Avoid frequent credit applications. If you apply for credit too often within a short space of time, your footprint indicates that you’re either running on frequent emergencies or you are losing control of your finances, therefore it drags down your score. The system registers a hard search on your profile each time you apply for credit, which in turn negatively impacts your score. A simple rule is think hard before applying for credit, run your maths closely.
Repay timely, or close credit accounts: where possible, set up direct debit or frequent instructions for your monthly repayments. Avoid late payments as this tells lenders that you are not disciplined and it may also attract late payment fees. Some lenders allow overpayment which could reduce your overall repayment. Use our Loan Calculator to simplify your repayments and you won’t go wrong. Then if you have multiple credit accounts, try to repay and close a few and see your credit score skyrocket.