4 Examples of good debt to help build your credit score

Taking out credit can cost you monthly instalments for many years, along with large interest payments and credit life cover, the latter in case you default.

But as demotivating as debt may seem, there are actually good reasons to consider pursuing credit. We have a look at four examples of good debt and find out how you can use these to build your credit score.

Tip: Find out what your credit score is so that you know whether it needs to be improved.

Good debt that’s worth taking out

According to Kriben Reddy, vice president of TransUnion Consumer, good debt is considered a sensible investment in your financial future. This is debt that helps you generate an income, or increases your net worth; as opposed to bad debt, which drains your wealth and offers no prospect of a future payoff.

Reddy lists the following examples of good debt:

• Student Loans: Investing in your skill set can increase your earning potential, and the resultant increased earnings can help you pay off the debt faster.
• Real Estate: There are many opportunities to make money in the property market if you make smart decisions. A simple strategy is buying a home, renovating it, and then selling it for a profit – or renting it out on a platform like Airbnb. Commercial real estate is trickier, but it can offer good cashflow and significant capital gains.
• Car Loans: For many, a car is essential. It gets you to work every day, and if you’re self-employed, it’s a key business tool. But be smart about it. Buy with your head, not your heart, or it could quickly become bad debt that breaks your budget.
• Small Business loans: Getting a loan to start or expand a business can be a good investment. With calculated and careful planning, it can also help carry you during tough times.

READ MORE: What's considered a good credit score?

Understand how your credit score works

Reddy believes that in order to improve your credit score, you need to understand the important factors that affect it, and make changes in those areas. He lists the following points:

• Account payment history - look at your credit report to see which accounts you have not been paying on time, or in full. Then make sure you pay the full instalment owing on each of your accounts by the due date every month.
• Too much debt - try to only use 35% (or less) of your credit facilities. For example, if you have a credit card or a store account with a limit of R1,000, don’t take out more than R350 on that account.
• Negative information - check your credit report for all negative information. Then, take active steps to pay all your outstanding debt so that this information can be removed from your credit report.
• Length of credit history - maintain a healthy mix of credit (for example, store accounts, credit cards, home loan, service contracts, such as cell phone accounts, and so on) to establish a strong and consistent credit history. The longer your credit history, the higher your credit score will be. But be careful not to have too many accounts open at the same time.
• Account application and enquiry activity - try not to shop around too much for credit. Too many simultaneous applications could suggest that there has been a significant change in your financial circumstances, which will reduce your credit score.

“Regardless of the type of debt, it’s important to manage it properly – being smart with your money isn’t about avoiding credit altogether. Good credit health is about meeting your obligations timeously to maintain a positive credit report,” says Reddy.

He explains that any failure to keep up with your credit obligations can reflect negatively on your credit report, which can have a longer-term impact when it comes to securing credit in the future.

“One of the first steps on the path to good credit health is to review your credit report and to see where you’re performing well – and where you could be performing better,” says Reddy.

“Being smart with your money will reduce your debt – and if you absolutely have to apply for credit, make sure it’s for an item that will improve your net worth, and not a luxury that’s only going to cost you in the long run.”.

The first step to improving your credit score is to find out what it is. Click here to get yours today.