How to get creditworthy when you don’t have credit

You may be earning well and able to afford to repay a loan or credit agreement comfortably, but if you don’t have a credit report, you may find your application for credit declined.

This is because when creditors assess your application, they are obliged to assess how easily you can afford the repayments (an affordability assessment) and to check the risk of you not repaying. They typically assess the risk by checking how well you have handled repayments in the past. This is recorded by the credit bureaux in your credit report which also determines your credit score. Read more: What is my credit report?

If you have no credit history or no recent credit history, you are known as a “thin file” or “no profile” client and will generally have no credit score or one indicating you are a high risk, Dirk Badenhorst, chief operating officer of VeriCred Credit Bureau, says.

This could mean your application for credit will be declined, depending on the credit provider’s risk appetite, and the type of credit for which you apply, he says.

Your credit report, however, is not the only information creditors use when assessing the risk of lending to you, he says.

How you manage your money

Ashay Ramnarain, head of credit at FNB Credit Card, says the bank recognises that young graduates starting their working life may not have a lot of repayment performance available and will then use different data, such as how well you manage payments on contractual agreements as well as how you manage your bank transactional and savings accounts.

Young people who have just started working are often advised to improve their credit score by opening a small credit account – a store card or credit card - and to manage it well. You can avoid interest on these accounts by repaying your purchases within the interest-free period – up to 55 days on a credit card and up to six months on store cards. Read more: What is a good way to manage my credit card?

Badenhorst agrees this is generally the best option and says a retail account is easier to get than a credit card. But he warns that if you don’t pay the account in full within the interest free period, the interest is generally very high on these accounts.

If you are renting, you may think your history as a tenant can help you, but payments in terms of a rental agreement are only collected by one South African credit bureau that specialises in tenant behaviour, he says.

Badenhorst says phone or cell phone accounts are reported to the credit bureaus and will count towards your payment history, but if you are using a prepaid account, it will not help your credit report.  

Payments in terms of insurance contracts are also reported and may be used to determine your score, Badenhorst says.

Bank behaviour

Ramnarain says FNB also considers its internal data, so if you are looking to build a credit history, you need to deposit your salary in an account with the bank and maintain regular debit orders well, while building up a savings balance.

He says your qualifications are an important factor when you are younger and may give you a higher chance of approval especially for your first credit product.

Thereafter, maintaining a credit facility by fully repaying the balance every month, with no missed payments or maintaining debit orders over a 12-month period is the gold standard for building a credit score and history, Ramnarain says.

However, there is now another way to build a credit record if you would prefer not to have any credit facilities.

Save your way to better credit

Pokkit is a new product provider that aims to help you save and build a credit history without actually incurring credit. Instead of potentially paying interest you can earn interest while building your credit score.

Johan Koornhof, the founder and CEO of Pokkit, says the product allows you to save anything from R100 to R4 000 a month and the money is invested in the Allan Gray money market fund and earns the interest that fund pays – currently close to 8%.

You agree to save each month for 12 months and the savings product is structured as a credit agreement in terms of which you purchase a savings voucher.

This allows Pokkit to report your payment behaviour to the South African Credit & Risk Reporting Association, which in turn reports it to all the credit bureaux. As long as you save each month, you can improve your credit score.

Koornhof says your credit score should start improving after a month and your score may be good enough after three months to qualify for a phone contract or hire purchase agreement.

Cell phone companies often rely on other factors as well and Pokkit plans to deliver Pokkit information directly to the cell phone providers, he says.

Score improving

Some bureaux update your credit score twice a week, but others do so monthly and you should see an improvement in your score in the first few days of the month, he says.

Koornhof says after 12 months, your score should improve by at least 50 points.

If it does not, you will be reimbursed the R15 a month fee that Pokkit charges. The proviso to this, of course, is that you don’t do anything else to jeopardise your credit score.

Scores differ across credit bureaux, but generally, you will need a score of around 650 to get a better interest rate on your credit agreement, Koornhof says. A good interest rate can save you thousands of rands over the long term of a home loan or vehicle finance agreement. 

To increase your score by 200 points as a result of maintaining a good record of regular payments could take up to 12 months, he says.

Badenhorst agrees positive activity will reflect on your credit history from the first month and after three to six months it will start showing some history. Time is your friend – the more history you have the better, he says.

What score do you need? 

Badenhorst says the exact score you need for any credit agreement depends on the credit provider’s risk appetite and rules for approving credit. Various factors are taken into account, such as your age, income, bureau information, affordability and any adverse information on your credit report.

A specific score won’t necessarily guarantee a specific product, as this depends on the amount of the loan, the product and your risk profile.

Koornhof says if you have defaulted on a credit agreement – for example, while you were struggling as a student, this negative information will remain on your record for up to five years, but building an improved score, by for example using Pokkit, will assist you to obtain new loans.

Having bad debt does not prevent you from building a better score, he says. You can apply to the credit bureaux to remove incorrect information and should avoid any further defaults or late payments or other negative events that will affect your score, he says. Read more: How can I improve my credit score?

If you use Pokkit to improve your score and need to access your savings, you can do so any time after the third month by using what Pokkit calls the Stretch facility. This lengthens the term of your savings agreement by the number of months of savings you withdraw and costs you a fee of 2% of what you draw.   

Credit agreements typically incur an initiation fee. Koornhof says you will only pay this R165 fee if you do not save for 12 months and you cash out all your savings early.

Redeeming your savings is best if you think you will miss a payment because if you do, it will negatively affect your credit score, he says.