I was too good when managing my money and shot myself in the foot!
I ruined my credit record
This is something I hear from conscientious first time property investors, all too often!
I have been pleasantly surprised to realise how many of our Organic Growth subscribers are students or young people in their twenties who have been awakened to the reality that the old methods of financial security are no longer applicable.
Grand-dad’s financial advice
They realise that one can no longer listen to grand-dads financial advice: That is, do well at school, get a degree, walk into a high paying job and be set for life.
Unfortunately this advice is now only valid in the world of make-believe, the belief that your job will provide you with all of the following;
- Financial security,
- a guarantee of no retrenchment,
- ability to afford a good house,
- a fancy car to impress your neighbours,
- tertiary education for your children,
- and lastly comfortable retirement: The promise that you can look forward to a blissful retirement on the pension provided by your employer.
The new rules
These same young people are looking for alternative routes to financial freedom by applying the “new rules” of growing wealth. Creating multiple active and passive income streams and augmenting their existing pension schemes. Residential property investment becomes a natural choice for many reasons, discussed here.
The problem comes in when they have done their homework, saved up a sufficient deposit , selected a good investment property and taken the plunge and made their offer.
The credit record problem
From an affordability standpoint, everything looks great, except for one thing, their credit record! There isn’t one!
As a result their bond application is turned down!
Because they have been too “good”, and avoided buying credit like the disease it is, there exists no record of whether they pay their debts on time!
Our banks are in business of lending money secured by property. A belts and braces risk avoidance strategy is the name of their game. So, when applying for a bond, the banks require proof that you are able to afford the monthly bond repayments.
They do this by requiring verification of your ID, your employment, a payslip and a few months bank statements . These will tell them if your salary is real and will also give them an indication of your spending habits. They then perform a credit check on the applicant though their own database and the independent credit bureaus such as Transunion and Experian.
If you have been one of those “good” ones who only bought for cash, you realise at this point that you have inadvertently shot yourself in the foot. The rules have changed, you have to create the impression that you love credit and manage it well.
So how do you ‘fix’ your credit record?
A simple two step fix is required!
Step 1 Apply for a credit card, use it for as many of your normal purchases as possible, and settle the balance outstanding EVERY month. The good news of this approach is some free credit. The first 30 days of credit is normally free. (check this when applying) so all month you spend the bank’s money without paying interest.
Step 2 In addition to your credit card, open one or two accounts with your regular retailer and clothing store, enjoy the freebie give-aways they offer new account holders, and spend as usual. But this time on account. Like your credit card, settle your account in full every month!
Do these two simple things and within a few months ( 3 to 6 months should do the trick) you will have a credit score, and be good to go!
One last word, the credit trap is very real, so be careful not to spoil your good record by letting the allure of ‘buy now-pay later’ get hold of you.
Use the system, don’t let it use you!
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Image courtesy of [Gualberto107] / FreeDigitalPhotos.net