How to break poor credit habits

Poor credit habits can cause a myriad of financial headaches. At worst, they can negatively impact your credit score, place you in debt, and hurt your financial future.

We investigate what poor credit habits are and how you can break them.

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Recognising the problem

When poor credit habits affect your pocket and your future financial stability, it’s time to act, says Darryl Adriaanzen, group executive: operations at African Bank.

As with any bad habit, recognising you have a problem is half the battle. But you can only kick those bad financial habits, and improve your financial health, if you are proactive, notes Adriaanzen.

He says the most common credit habits you need to break include:

Using debt to finance a lifestyle that is above your means. Many of us go out of our way to keep up with our neighbours, but this is the quickest way to get into debt. Rather do what you can with what you can afford, and set your own benchmarks for success.

Buying items on credit you can’t afford and don’t need. Many of us understand the difference between wants and needs, but still convince ourselves that we need items we would like to have. Needs are necessities you can’t do without, such as food, a roof over your head, and staying warm in winter. Wants are the nice-to-have items on our wish list, such as a holiday, fancy clothing, or dining out.

Making late payments. Late payments attract additional fees, interest, and potentially legal fees – all of which hurt your credit record.

Not talking to your creditors when you are experiencing financial difficulty. Most creditors are willing to negotiate payment arrangements if asked. It is better to pay a little than to stop paying completely. Ignoring your debt will not make it go away; it will only worsen your situation.

Using debt to pay debt. This habit is also referred to as “kite flying” and has a snowball effect on the interest you pay.

Taking short-term cash advances or loans. Once you succumb to the temptation to take short-term cash advances or loans, you have entered a debt trap that is difficult to escape. The sky-high interest charged on such loans can make them difficult to pay back, forcing you to take out a new loan to settle the previous one.

Taking remedial steps

Capitec communications specialist Chandré Matlala says good credit behaviour shows your bank, landlord and even employer that you can work with money and take ownership of your credit activities. Credit is not the enemy; bad credit habits are.

Matlala advises replacing your poor credit habits with these:

Do your homework. Before you apply for credit, it’s essential to understand:

• From whom to borrow. Use a trusted institution and stay away from loan sharks.
• Your credit history and how this will influence your loan application.
• Why you want to obtain credit.

Stay actively in charge. Managing your debt is vital for financial health, which means understanding all of your financial commitments.

• Check your credit report at least once a year. 
• Draw up, and stick to, a budget. It can be very rewarding to set financial goals and stick to them. A budget will give you a better idea of how much you earn and how much you can spend. It will help you create a plan or strategy to pay your debt off faster, or show you which payments would be better serviced by debit orders. Without a budget, you have only a vague idea of your financial behaviour, which can be disempowering.
• Cut down on as many unnecessary expenses as you can. Use any freed-up funds to increase your debt payments wherever possible. 
• Keep a folder containing all communication from your credit providers, so that you know the status of your accounts.

Check your interest rates. It’s a good idea to pay off the loan with the highest interest rate first.

Pay on time. Schedule your monthly payments and pay at least the minimum amount on time, every month, on all of your accounts. Your payment history has a big impact on your credit score.

Pay more (if you can). If you can pay more than the minimum repayment, then do so. 

Adriaanzen adds two further tips:

Save for emergency- or unplanned expenses. No money in the bank means you will have no choice but to use credit cards and loans for emergencies. This can plunge you into debt.

Continuously monitor your credit. Ignoring your bank statements means you don’t know where your money goes, or how much interest and fees cost you.

Tip: Do you know what your credit score is? Register now to obtain your detailed credit report for free.