Lack of credit history can work against you in time of need

Monwabisi Mdlalose, an IT specialist who has been working for almost 20 years, has never taken credit in his entire life and does not want to do so until he buys his first family home.

So wary about his credit status that Mdlalose even bought his first car, a Toyota Yaris, for just over R150,000, cash.

Mdlalose is one of more than 27-million South African consumers who were considered to be either credit unserved or underserved in the country at the end of March 2022, according to the global TransUnion recently-released study Empowering Credit Inclusion: A Deeper Perspective on Credit Underserved and Unserved Consumers.

The study also noted that about 16% of consumers who started as credit underserved were found to have migrated to becoming more credit active in a two-year window prior to the pandemic.

Unserved consumers are defined as any person who has never had an open traditional credit product such as a credit card, personal loan or vehicle finance loan.

A credit score can be seen as a measure of one’s credit risk.

The higher your score, the lower the risk that you pose to the lender and therefore you may seem to be a more attractive customer.

However, some people don’t have a credit score, meaning there is little or no information on their past credit  behaviour, which can make it difficult for them to get credit for big purchases.

But for Mdlalose, living without credit is something that started way before Covid-19 and in fact, his parents have a lot do with it.  

“My mom was a domestic worker and my dad a truck driver. Back then they were paid their salary in cash and didn’t have a bank account. Things changed when cellphones came and my dad had one and then he started getting calls from people who sold him different products, including financial products,” recalls Mdlalose, 47 who grew up in Pietermaritzburg, KwaZulu-Natal.

“He kept resisting the temptation until one day he succumbed to and gotten a bank account and a few months later he took a clothing account and this escalated to bigger expenses like bank loans. This happened over time until he sunk deep in debt.

"We didn’t have amazing quality of life but got by until the situation started becoming worse to a point that we could barely afford food that would last for the entire month. My mother took on the responsibility up to the day my dad decided to take his own life because he didn’t feel “like a man” anymore,” says Mdlalose.

It was this life lesson and watching his father drown in debt that instilled the fear for credit in Mdlalose.

“Ever since I was a young boy and getting into the job market, I tried to stay away from taking credit. I buy everything cash. The only monthly expenses that deduct from my account are policies, rent and school fees for my two kids.

"My wife has bought stuff on credit but it’s not a lot and we are able to live comfortably with the money we make together. The only time I’m likely to take credit is just before I buy my first house. I was advised that I’d have to create some form of a credit history before I can buy a house,” said Mdlalose.

Experts advise that having never had debt can be a disadvantage on its own as prospective lenders would not know the borrower’s spending behaviour.

However, if managed well, having some debt is more helpful than harmful, especially for big purchases like a car or a house.

If you have a (good) credit score, it not only makes it easier to secure the funds you need from a lender, but also puts one in a stronger bargaining position to negotiate the best possible interest rate for your purchase.

This is also echoed by Lee Naik, CEO for TransUnion Africa, whose study revealed that more and more South Africans are choosing to be debt-free by being underserved.

“These credit disadvantaged consumers are often unable to access financial products and services because they have no, or little, credit history. This study served to better understand how many people are truly under- or unserved from a credit perspective, while also determining paths for them to gain more credit opportunities.

“The most common first credit products held by underserved consumers in South Africa were clothing accounts (59%), followed by personal loans (31%). This mirrors broader trends that TransUnion has observed in SA, where clothing accounts and personal loans are the most common first product for consumers entering the credit market,” said Naik.

The study also shows gaps in the economic activity that can benefit both lenders and borrowers.

“Consumers who migrated to being credit served are mostly young with comparable risk to already established consumers, who are no longer new to credit, but for whom graduating to being credit established or served has taken longer than for other consumers.

"These consumers appear to want more credit, but they are not necessarily able to access the credit they want, potentially due to their limited credit history. This highlights a missed opportunity for lenders who are seeking to grow and add new customers,” said Naik.

sifilel@sowetan.co.za