You have told yourself you will not live in debt, so no credit card, clothing account or the likes. You pride yourself on buying everything in cash... well, until you want to purchase a car.
You do not have enough in your savings, and you realise you will need help from the bank. Shockingly, the bank denies your car-loan application, on the basis that you do not have a credit record.
Banks need a record of how you manage existing debt.
Debt counsellor Stephen Mulima explains to HuffPost why a credit record is necessary when applying for credit.
"Banks need a record of how you manage existing debt," said Mulima.
He pointed out that while living debt-free can be seen as being financially responsible, banks have no other way to assess what you do with credit and whether or not you can handle it. That's why they say, "You can't get it (credit) until you have it."
"If you have a clothing account, for example, and you always pay the due amount, on time, this reflects positively on your credit record. It proves that you can pay back debt responsibly, and it boosts your future creditworthiness."
Notably, to get your credit record, the financial institution or lender will ask for your credit profile from a credit reporting company, called a credit bureau. The report will include your history of payments to creditors and public records, such as judgments or bankruptcies, which can affect your creditworthiness.
Mulima cautions against "going wild with credit" in the name of building a credit record. "An over-indebted person, even if they pay on time, carries greater risk to a credit lender [than] a person who has 'sensible' credit obligations."
He also warns against building credit through highly tempting means – like a credit card or a clothing account. "You know your weaknesses. If you're not disciplined, you can max out your credit card in no time, and in one day shop to the max of your clothing account. Credit-card interest rates are very high."
A medical-aid scheme, insurance premiums and cellphone contract, for example, are more "sensible" credit obligations that help build your credit record, Mulima says.