In our article How trying to build a credit record led to a debt-trap, Afika’s decision to take out a credit card to create a credit record ultimately led him into a situation where he had over R70 000 in credit card debt and R3 500 a month was going to pay off his card and interest – money that he could have been investing instead.
Banks have created a perception that you have to prove your track record in re-paying debt by taking out credit cards and personal loans. They encourage customers to take out “small” credit balances which they should “manage sensibly”.
There is something fundamentally wrong with a model where a person who chooses to live without consumption debt (store cards, credit cards etc) would therefore be penalised by this decision. There is a very big difference between taking out a mortgage with a set payment period and the dangers of revolving credit offered by credit cards. A credit card can get you into a lot more trouble than a home loan.
While the banks have a vested interest in creating the perception that credit cards and personal loans pave the way to home ownership, there are many other ways to prove that you are the type of person that meets their obligations.
Manage debit orders
Firstly you can set up a debit order into a savings account. By managing that debit order and not allowing the debits to bounce you are proving good financial management. Any contract such as an insurance premium or medical scheme premium would all be considered financial obligations. By meeting these obligations you are already proving a track record when it comes to money management.
Tommy Nel, head of credit and pricing at FNB, acknowledges that the bank would not turn away a customer just because they have no credit history. “There is no rule that says you can’t get a home loan without a credit history. Our decision to approve a home loan would not be based on a lack of credit history, but we would require a deposit,” says Nel who explains that the fact that you are able to save up for a 10% deposit demonstrates to the bank that you have the discipline to manage your finances.
So in Afika’s case, rather than spending R3 500 a month paying off a credit card, he could have paid that money each month towards a deposit on a home. In less than two years he would have had enough money to put down a 10% deposit on a R700 000 home. This deposit would reduce his mortgage repayments from R6 524 a month to R5 872 – saving R650 per month. Taking the example further, he could even turn that R70 000 deposit into a R212 000 saving on interest if he continued to pay the higher mortgage of R6 524 and paid his mortgage off in 15 years.
If you can prove that you have sound banking behaviour, have several debit orders off your account and have saved up money for a deposit, no bank is going to turn you away as a potential customer – in a country where every second credit-active South African is over-indebted, you will be too valuable to say no to.