- Need for debt
- Need to be debt-free
- Alternatives
Are interest rates set to rise later this year, or next?
Perhaps now is the time for consumers to get debt-free and start paying off those debts?
This means no credit cards, no accounts at retail stores, no vehicle finance or any other debt for any other reason. No matter how small it may seem!
Consumers who have high debt levels should consider paying it off as soon as possible anyway, but while it is good advice to try and live debt-free, it can also be hurting you.
That’s quite counter-intuitive, isn’t it?
Specifically, having no debt or credit history might eventually be problematic for those of us looking to purchase a house.
Need for debt
Only about 5% of first-time home buyers are able to buy and afford a house without requiring financing from a bank or a lending institution.
This is a small percentage on its own and it is an even smaller figure when considering the total number of first-time buyers entering the market.
Very few buyers are in a fortunate financial position where they can buy a home or property outright and the majority of potential homeowners need financial aid in some form or another.
This essentially means that first-time buyers will need to apply for a bond in order to be capable of buying a house. Applying for a loan can be quite a tricky process.
Having too much debt and a bad credit score attached to your name might mean that you will not qualify for a loan.
On the other hand, having no debt at all will not provide any security to the financial institution. They will not be able to ascertain whether you will be able to pay the monthly instalments on your loan.
It is a good idea to try and find that perfect sweet spot between having too much debt and having too little debt.
Need to be debt-free
Some buyers may have absolutely no credit instead of bad credit and, as mentioned earlier, this could eventually become a problem as well.
After all, lenders want to see if you can afford to repay the bond every month and without evidence of you ever having paid off anything, there is no actual proof that you can.
In other words, having no credit history makes it difficult for lenders to assess a buyer and the potential risk associated with approving the finance needed to purchase a property. Even though the ideal situation is to be debt-free, you can’t be completely nonexistent in the world of credit and debt.
When building a credit history, moderation is key.
It is important that consumers are careful not to overuse or underuse their credit. Usually, you will need some sort of credit history in order to be approved for a home loan, so it is wise to purchase on credit every now and again. The vital part here is that consumers should be prudent with their credit and not reach their limit within the first few months.
It would not be wise to make purchases that are well and beyond your financial means. If you won’t buy it cash, then don’t buy it on credit.
Alternatives
For homeowners with little or no credit history, there are a few alternatives.
Firstly, you could create an alternative credit history compiled of previous rental payments, insurance, and premiums or utility bills. This might take a few months and it might mean that you are going to pay higher interest rates on your bond.
The other option is to get a credit card and spend a manageable amount on it. You must pay the minimum monthly payment for the next few months in order to generate a credit history.
Bottom line: other than building up good credit for the sake of eventually buying a home, it is still wise to remain as much debt-free as possible.
