How to Build Good Credit with Good Debt

Whether you’re just starting out on your personal financial journey or trying to rebuild your credit rating after debt, building good credit helps establish firm foundations for your journey to financial freedom as it is what determines your credit score. A credit score is a number lenders use to help them decide how likely it is that they will be repaid on time if they give a person a loan or a credit card. A high credit score shows lenders you’re not a credit risk and will improve your chances of getting your loan approved.

“Building up your credit score will have huge benefits to your financial journey. Not only will you have a better chance of getting your loans approved by the bank, but you will also be able to negotiate better terms on your interest rates” explains Cyber Finance CEO, Hans Overbeek. Many people always associate the term ‘debt’ with loan sharks, black-listing and a lifetime of bills hanging over your head. However, building up a good credit score can only be done by building up good debt. Cyber Finance has put together a guide to show you how to build up good credit with good debt.

Understand the difference between Good and Bad Debt

Yes, there is such a thing as good debt! The old saying, “it takes money to make money” perfectly exemplifies the concept of good debt. Any credit that that helps you generate an income and increase your net worth is considered debt worth accumulating. For example, home loans, student loans and small business loans. All of these will allow you to generate more income to pay back the loans and move on to make a profit. Bad debt is accumulated when you borrow money to buy depreciating assets or goods that won’t increase in value. For example, cars, consumables and clothes. You’re effectively borrowing money to pay for things that won’t generate you any income to help you pay the money back.

Consider a Secure Account

A secure account, such as a secured credit card, is an account that requires a refundable deposit that the issuer holds as collateral until the account is closed. Secure accounts help build positive credit history as the use of a secure account is reported to credit bureaus. Therefore, maintaining good payment history will positively affect your credit score.

Pay your Bills on Time

Paying your bills on time is a sure-fire way to ensure you are maintaining your credit score. Credit bureaus need to see that you take responsibility for your loans by paying your bills on time, every month. If you are trying to rebuild your credit score, make any past-due accounts current and pay them on time going forward. If you are someone who struggles to stick to deadlines or forgets to pay bills, then set up payment reminders or automatic payments that go off each month.

Be careful with new credit

Credit bureaus are wary of people who open multiple new credit accounts in a short space of time. It gives the impression that you are experiencing financial difficulty and are living off your debt and beyond your means. Credit card applications also appear as ‘hard inquiries’ on your credit report. Hard inquiries are all of your recent applications for new credit. Having too many hard inquiries doesn’t look good on your credit record and will negatively affect your score and your ability to apply for new loans.

Credit History

Your credit history is a report that displays how long your credit accounts have been active for and how frequently you keep up with payments. A good credit history is determined by a healthy mix of credit (store accounts, service contracts and home loans) that you frequently pay back and keep up-to-date.

Building up a good credit rating is vital as it allows you to build up a good relationship with your credit bureaus and reap the benefits of favourable terms and interest rates. Everyone needs a credit score — it enables you to not only apply for loans, but also apply for basic services, such as a cellphone contract or an internet service. Understanding how to maintain yours will help you achieve financial freedom, quickly and efficiently.

“Applying for credit isn’t bad; applying for credit without a firm plan to pay it back is one-way ticket to being blacklisted. Make sure you understand how to stay in your credit providers good books so that you can make the most of your loans,” concludes Hans Overbeek, CEO of Cyber Finance.