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Thursday, October 22, 2020

Build and protect your credit standing

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Roxanne Sarthou
Roxanne Sarthou
Roxanne Sarthou graduated from the University of the Philippines, Diliman. She is an Australian-qualified Financial Planner, Private Banker, Lending Manager and Property Investor. The information provided in this article is that of the author. Readers may get in touch with her via email on sarthou@honourbrothers.com.

Robert Kiyosaki likes to say that the quickest way to create wealth is to use other people’s money. The problem, of course, revolves around getting other people to let you use their money in the first place. 

You may be forgiven for thinking that if you don’t have any outstanding debts your credit rating should be OK but, unfortunately, that’s not the way that contemporary credit systems work. The truth is that a person who doesn’t borrow and never owes money may have no credit rating at all, simply because that individual has no history of ever having incurred debt.

To put matters simply, you establish your credit history by successfully meeting the obligations required to service debt.

Not everyone is comfortable with debt. A lot of us, especially members of the older generation, were brought up to believe that getting into debt is a bad thing, and borrowing money should be avoided whenever possible.

It takes a radical shift in mindset to recognise that taking advantage of credit can be good and that using other people’s money to our advantage can open the doors to creating personal wealth, beyond what our individual resources are capable of.

It may sound ironic, but one of the easiest ways to start building your credit rating is to sign up for a credit card. The most popular type of credit card — and the type you should get if you can qualify for one — is an unsecured credit card. This type of card doesn’t require a deposit for use but comes with the agreement that you will pay the money you borrow back over time.

However, unsecured cards might be difficult to qualify for if you have no credit history to begin with. After all, you need to give the banks a reason to trust you.

On the other hand, you will have a definite advantage if you have a stable job, and verifiable income or any type of positive reporting on your credit report. If you don’t have any of these things you will probably need a cosigner or someone who will be jointly liable for paying your bills if you default.

Choose a credit card that meets your needs. For example, you may want to look for cards with cash back rewards you can use to pay down your balance or those with an installment plan feature to spread out payments at lower interest rates.

To begin establishing your credit history, use your credit card for small purchases, and always pay your credit card bill on time, every month. Keep credit card balances low, and don’t open too many new accounts (or close any old ones).

If you already have credit cards that you regularly use, and have extension cards in the name of other family members, ensure that you keep their spending in check, so that paying off your monthly billing doesn’t become problematic.

Check your credit card statements carefully every month. In case you find any transactions that you didn’t actually make, be sure you ring your credit card company straightaway and lodge a dispute against the erroneous charges. Instances of credit card fraud are not unusual, and constitute a major problem for all credit card providers.

Note that one of the quickest ways to destroy your credit rating is to max out a high-limit credit card. If you’re carrying a high balance on your card, it suggests that you are overspending. Lenders prefer to see you have a lot of credit available that you’re not using. If you have a card that’s at your limit, consider making additional payments to reduce how much of your credit line you’ve used.

The only thing worse on a credit report is missing payments. Lenders will shy away from extending credit to applicants with a history of missed payments.

One of the best ways to avoid missing payments is to set up automatic payments through online bill pay. Your payment history typically accounts for a third of your credit score, meaning every missed or late payment can have an impact on your credit. We’ve all had that moment when we find a bill under a stack of papers and realise we’ve almost missed the deadline. 

So what happens when you default on important payments?

In general, most types of defaults will last in your credit history for five years. However, court writs last for four years while clearouts last for seven years. A clearout happens if you owe a creditor money, but you’ve changed your contact address without providing the creditor with your new address.

Check your credit score at least once a year. There are free online apps that connect directly to Equifax, which allow you to check your credit standing without adversely affecting your credit file.

There are three main credit reporting bodies that keep track of your credit score in Australia. They are Equifax (formerly Veda Advantage), Dunn and Bradstreet and The Tasmanian Collection Service. Of these, Equifax is by far the largest Australian reporter—Equifax reportedly maintains records on over 11 million individuals both in Australia and in New Zealand.

To further boost your credit rating, look for other areas where your credit movements might be reported. 

A handful of companies have built entire businesses around helping people get certain bills reported on their credit. Rental Kharma and RentTrack focus specifically on rental reporting. With either service, you can get bills that wouldn’t normally get reported – like rent payments – listed on your credit report. If you’re unable to qualify for a credit card, these services offer another avenue to get credit for any on-time payments you’re making.

READ MORE: Ways to avoid getting bad credit rating

After some time, apply for a different type of loan or credit card in order to improve your credit mix, which makes up approximately 10% of your credit score. Only take this step when it makes sense to do so. Also, keep old accounts open – even if you aren’t using them. The actual length of your credit history makes up 15% of your credit score.

Even if you have no immediate intention of applying for or securing a loan, there are some practical applications you need to consider. Landlords, for example, will sometimes investigate your credit background to determine if you’ll make a good renter or lessee. Prospective employers may also use your credit score as an index of your reliability, trustworthiness and self-discipline for a given job.

Finally, remember that building up your credit score and doing your best to protect your credit rating is how you gain unlimited access to other people’s money. Master the process, and you’ll never run out of options when the opportunity to make meaningful investments present themselves!

(Roxanne Sarthou graduated from the University of the Philippines, Diliman.  She is an Australian-qualified Financial Planner, Private Banker, Lending Manager and Property Investor).

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