Landsdowne Property Group, one of South Africa’s residential real estate managers and estate agency companies says having a good credit record is a powerful tool for tenants, and it empowers them to negotiate more favourable lease terms.
In a competitive rental market, a strong credit history helps tenants secure quality properties while also paving the way for future financial opportunities, such as home or personal loans.
Jonathan Kohler, Founder and CEO of Landsdowne commented says: “Rising living costs and prolonged high interest rates have significantly impacted tenants’ ability to afford rent, with many now spending as much on debt repayments as on rent. In our portfolio, we observed a decline in rental agreements last month, reflecting the strain on tenants’ financial situations.”
Last month, the Reserve Bank reduced interest rates by 25 basis points to 8% annually, leading to consumers now paying a prime rate of 11.50%. While this is a positive development and suggests the possibility of further rate cuts, Kohler said that the benefits of lower interest rates will take time to reach financially constrained households.
The PayProp Rental Index for the second quarter of 2024 reveals that the average tenant spent 46.7% of their income on debt repayments and 30.3% on rent, leaving only 23.0% on other expenses. A common guideline for rental affordability suggests that tenants should ideally spend no more than 30% of their income on rent.
“Increased tenants’ obligations result in downward pressure on the rental market, prompting savvy tenants to seek more affordable properties to maintain their creditworthiness,” says Kohler.
Kohler says that without a credit history, it makes it challenging to secure home loans and rental properties, as creditors cannot assess an individual's payment history and affordability. A credit record is typically established through various forms of credit, such as cellphone contracts, store accounts, or bank loans.
When evaluating potential tenants, landlords and rental agents focus on net monthly income—the tenant's salary after taxes—to determine affordability, often relying on credit checks conducted by bureaus like TransUnion.
Credit bureaus calculate a credit score based on an individual’s payment history and overall debt. This score reflects how effectively one manages existing credit at the time of application.
According to TransUnion, a credit score is categorised as favourable (614-680), good (681-766), or excellent (767-999), with higher scores indicating better creditworthiness. Conversely, a poor or below-average score signals the need for improvement in one’s credit risk profile.
Here are five effective strategies to build and enhance credit:
Pay bills on time: Timely payments are crucial for improving your credit rating, as late payments can remain on your credit report for up to five years. If you miss a payment, make sure to settle the balance as soon as possible.
Pay more than the minimum: Paying more than the minimum due not only reduces the total interest paid but also helps you pay off debts faster, especially smaller balances, which can lower monthly expenses.
Reduce debt: High debt levels can negatively impact your credit score. Aim to pay off and close some accounts or credit cards, consolidating to just one or two if possible.
Limit new credit requests: To effectively build or improve your credit rating, avoid taking on additional debt, such as new personal loans or credit cards, during this period.
Check your credit report regularly: Monitoring your credit report is essential for tracking progress and identifying areas for improvement, helping you to boost your credit score over time.
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