1. Build good credit history and repair past problems
If you already have a marred credit history, you must make an effort to repair past problems and start building good credit history. While some of the steps below can assist you to improve the way a financial institution would assess your credit application, they will probably reject or at least query any bankruptcy petitions, summons, or repayments in arrears of more than 3 months. Many financial institutions now start classifying accounts with repayments in arrears of more than 3 months as non performing loans.
The simplest way to repair past problems is to speak to your creditor to negotiate a repayment plan. There are many ways a financial institution can further help you to restructure your current loans and/or consolidate your loans. If you have a summons or bankruptcy proceeding against you, consult with a lawyer your best alternative to action to repair your credit rating.
2. Cancel unused credit cards, debts and accounts and consolidate your debt
A few months prior to when you think you may purchase a home by a home loan or arrange for the refinancing of your home loan, clean up your debt.
Firstly, cancel unused credit cards. Some experts recommend holding between 2 to 4 credit cards provided by major credit card companies. When you have cancelled a credit card do double check with the financial institution that you have no more amounts outstanding with the financial institution and that your account has been properly closed. If possible, request for a faxed confirmation and include this in your home loan application.
Canceling credit cards can also sometimes improve your debt service ratio even if your credit card balances are low or virtually empty. This is because a bank will assume that you will use at least 10% of you’re the limit of all your credit cards.
If possible, close and consolidate all your other debts prior to applying for a home loan. If you have an additional car and you intend on selling your old car, try to sell and settle the hire purchase on the old car at least a month prior to applying for your home loan. If you have a few personal loans or overdraft accounts, try and consolidate the accounts into one or two accounts and close the rest of the accounts. As with credit cards, check that the accounts have been properly closed and if possible, obtain a confirmation.
If you cannot minimise your debt balances and consolidate your debt it is still worthwhile trying to close one or two accounts and think of how you would consolidate your debt. When speaking to you, financial institutions often want to see that you are making an effort to clean up your finances and planning to consolidate your debt. Financial Institutions may even recommend their loan products to assist you if they see you are making an effort.
3. Time applications correctly
At the time applying for a home loan, try and best ensure that you are no more than 1 month in arrears of all the repayments on your loans. Better still, maintain a good track record of loan repayments at least 6 months prior to applying for your home loan.
Additionally, it may be a good idea to space out your loan applications. If you intend on applying for a home loan, personal loan to furnish your home and car loan at the same time, it may be beneficial to prioritise and apply for each loan as and when the other is finalised. However, you can apply for a home loan on the same property with different financial institutions.
4. Avoid situations beyond your control that may damage your credit rating
Avoid being a guarantor or providing an indemnity for any loan. Many people are not as hesitant as they should be to lend their names to help a friend obtain a loan. However, if the primary borrower defaults on the debt your were guarantor to, you will probably be liable for the debt. If you cannot repay the debt, you could be issued a summons and even be sued for bankruptcy.
Further, you may be unaware that you may be participating in a fraudulent loan and this may have severe consequences including a jail sentence. Some people are not aware that they are implicated in a fraudulent transaction until they receive their bills or when suddenly served with legal notices. In some cases, they realise when they try to renew their documents like driving license, passport, identity card or when they attempt to get credit facilities. Typically, in the latter, the credit grantors may inform them that they have been sued and request of them for proof of settlements.
While it is common knowledge that principal credit card holders are responsible for debts incurred by their supplementary card holders, many do not realize the reverse is also true in most cases. Supplementary card holders can also be responsible for all debts incurred by the principal card holders.
5. Spend within your means, keep up on debt repayments and never be late
The best way to have a good credit rating is to establish a habit of paying for all your debt promptly. Devise a sound financial budget and plan, ensuring that you have sufficient every month to repay your loans, pay for your utilities and monthly expenses, pay for prudent enjoyment and also some left over for savings and stick to it.
Ensure that you control your monthly credit card spending. The convenience and relative ease of obtaining credit today has encouraged reckless spending. What many people don’t want to realise is that they will eventually have to pay for every cent that they spend on credit cards. Additionally, credit card interest is high and can accumulate making the debt you owe higher.
Always try to follow at least the minimum repayment plan for your financial products. Even if you're struggling, don't default or miss payments. If you are in difficulties, it may be cliché but contact your lender. Often lenders are helpful in assisting you to change your repayment schedule. Changing your repayment schedule is preferable to you defaulting.
Financial discipline is crucial in a society where credit is easy to obtain. Budgeting and prudent spending is key to financial discipline and maintaining a good credit track record. Excessive spending beyond what you earn will bear dire consequences to your financial health.
