Credit can be a tricky thing. Some actions are obviously harmful to your credit record, like paying late (or not at all), or maxing out credit cards. But some mistakes aren’t that obvious and you only realise later on that your credit record has suffered a blow. The right credit at the right time can be a major game changer to your life and your financial well-being. But taking out a loan is never a decision to be made lightly.
“The fact that you qualify for credit, does not mean you are ready to take it up,” says Mark Young, deputy CEO at Bayport Financial Services. Individuals who are unprepared for the responsibilities of credit often do more harm than good to their credit profile and end up with more debt than they can handle. The golden rule of credit is to always borrow responsibly. This means taking up only what you can afford, and paying your account on time, all the time.
Your Future Now has compiled a few important points to think about before applying for a loan.
What credit providers look at when you apply for a loan
Credit providers want to be confident that the credit they grant will be paid back on time and in full. Therefore, they conduct a credit risk assessment using the following criteria:
- Can you repay the loan?
The call on whether or not you can afford to repay the loan on time depends largely on your gross income and expenses. Make sure that after all your expenses and your new loan installment that you have extra cash in your pocket.
- What does the economy look like?
A poor economy might make it harder for you to repay the credit. Credit providers consider factors that might affect your job and income, such as the potential for strikes or retrenchments in your industry. Once you qualify for a loan it is important that the monthly repayment amount still leaves you with extra money at the end of the month as financial surprises like rate hikes can occur.
- Will you pay if you can?
Your credit history is the clue credit providers use to determine the risk you might pose to them. They assess your credit profile from a credit bureau and check their own credit records to see how you managed your relationship with them and other credit providers in the past.
“How you managed your finances previously will have a big impact on your ability to get a loan in future,” says Mark. “If you have drawn up a personal budget and ensured that you can afford it, credit can be a great way to relieve financial pressure and start building an asset base for your future.”