What is a Credit Score?
“A credit score is a tool used by lenders to help determine whether you qualify for a particular credit card, mortgage or service. Using the information on your credit report and any additional information you supplied as part of your application, lenders use a mathematical model to calculate a score that represents your credit history” (Equifax, 2018).
Your credit score will not only determine whether you get approved by lenders (including credit cards, store credit, vehicle
and home loans), but it will also affect the type of interest you pay on these loans. That means that the higher your credit rating is, the less interest you are going to pay back to banks and other lenders.
Credit scores tend to range from 0 to 999 and are based on a handful of factors:
- Your payment history
- How much you owe
- The age of the accounts
Judgementsand defaults Enquiries(every time you apply for credit, the company will submit a check to see whether you’re applicable – this affects your credit rating).
Everyone starts off with a low (non-existent) credit score and it’s up to each person to work on that score so that it starts to improve.
The following is an example of a TransUnion Consumer Credit Score Scale:Different bureaus have different scoring parameters.
- Start building up a credit history
- Make your payments on time
- Keep your debt low
- Top Tip! Set up debit orders for paying your bills – this will ensure you’re never late on paying your bills and it will always prove that you’re better at managing your money.
The Secrets To a High South African Credit Score
Having a poor credit score or no credit score is basically the same thing, at least to companies deciding whether or not to lend you money. This means that whether you’re just starting out as an 18-year-old aiming to start building your credit rating, or whether you’re looking to repair the damage done from years of poor credit rating management, you need to follow these steps.
*Those who are facing blacklisting or debt management plans will need to look at a more
13 Simple Steps to Building Your Credit Rating
1. Always make your payments on time
Making your payments on time is important because this could end up making up 35% of your total credit score. It can be easy to forget to make a payment by its due date, and you might not think it’s a big deal making the payment a day or two later, but it is. If you struggle to remember to make your payments on time, set up a debit order.
2. Pay Off Credit Cards First
Credit cards usually have the highest interest rates, so pay them off first. Try to keep the balance on your credit card as low as possible.
3. Try To Make An Agreement Before Going To Court
Going to court could waste your time and money and it can affect your credit rating for years to come. Try to make a payment arrangement with your creditors before legal action is taken. Please note that if you are summoned to court you have to go.
4. Keep Debt Low
A good rule of thumb is to limit your household debt (that includes both adults living in one house) to two credit cards and two major debts, such as your mortgage and car loan.
Top Tip: You should never be paying more than a third of your household income towards debt (this includes mortgage and car payments).
5. Maintain High Credit Limits and Low Amounts Due
Rather than lowering your credit limit, make sure that you keep them high but don’t use the credit available to you. Rather, keep your minimum payments really low.
Top Tip: When it comes to deciding which debts to pay off first, pick those that are near their credit limit.
6. Close Accounts You Don’t Use
It might be tempting to keep open those accounts that you don’t use (for a rainy day?), but it could actually hurt you, rather than help you, because it tells lenders that you have a lot of credit available to you and this could be risky, should you decide to max everything out at once. Rather, close the accounts you don’t use and don’t forget to tell the lenders to inform the credit bureaus that you’ve done that.
7. Apply for Credit with Care
Whenever you apply for credit, whether it is for a store card or a mortgage, the company does a credit check and this affects your credit rating. Credit checks alone can make up 10% of your credit score, so make sure you keep these applications to a minimum when you’re in the process of attempting to build your credit score.
8. Don’t Try to Pay Off One Debt with Another
Paying off one credit card with another one might be appealing because it will keep the creditors off your back for a while, but this isn’t always a good idea. It can sometimes make it more difficult for you to pay off the total debt in the long run.
9. Try To Avoid Using a Revolving Credit Account
A revolving credit account allows you to repay your debt when you’re good and ready, but these aren’t helpful – they not only remove your incentive to repay your
10. Too Little Credit is Bad For Your Credit Rating
You might already know that too much credit is bad for your credit rating, but did you know that too little credit is too? The number of years that you’ve had credit will count as much as 10% towards your credit score. It also tells creditors that you have experience in managing credit. If you’re not sure about taking up credit, start off small with a credit card and pay off your loans before the interest kicks in. That way, you’ll benefit from having credit without the worry that you’ll be accumulating debt.
11. Spouses Affect Each Other’s Credit Ratings
If you’re married, your partner’s credit rating could affect your own, so be aware of this.
12. If You’re Falling Behind, Take Action First
If you’re falling behind on your monthly payments, don’t wait until your creditors contact you – call them first. This way, you can arrange to pay off your debt in a way that better suits your financial situation.
13. Apply for Credit Reports
If you don’t know what your credit rating is, how do you know what steps to take to improve it? Furthermore, did you know that around 80% of credit reports contain errors that could be affecting your rating? Once you’ve applied for a credit report, make sure you go through it and contact the credit bureaus if you spot any errors.
Business owners can contact the Credit Information Ombudsman on 0861 662 837.
Everyone should check their credit report at least once a year, but more regularly if you’re able to sign up for an account with one of the major bureaus.
The most important reasons for checking your credit record are:
- It helps you to determine how suitable you are for a loan.
- It can help you to quickly notice identity theft.
- You can scan it for incorrect information and alert the bureau before it has a negative impact on you.
Top Tip: While you can pay to get your monthly credit report sent right to your email, you can also apply for one free credit report every year from many major bureaus,
Preventing Identity Theft with a Credit Report
According to Compuscan, a leading credit bureau in South Africa, identity fraud is on the increase within the country. In 2014, there were more than 20 million active credit users in South Africa and there was an increase of 16% in cases of identity fraud between 2013 and 2014.
So, how can credit reports help prevent an identity thief from causing havoc on your financial and personal life? By scanning your credit report, you can see whether there have been any
In the event you spot something suspicious – such as an application or loan made out in your name that you haven’t applied for, you need to report this to the police and get a case number. It is also useful to report the fraud to the Southern African Fraud Prevention Service on 0860 101 248.
You can then get in touch with the Credit Information Ombudsman on 0861 662 837 in order for them to assist you in resolving the fraud-related debts.
A Sample Credit Score
Just as it is important to understand how a credit score is affected by sound financial decisions, it’s equally important to understand how poor financial decisions can affect these scores.
The following is an example of two individuals who have started with different credit arrangements and made poor financial decisions that had an impact on these scores:
As you can see, some of the decisions had a much larger impact on the scores than others. While maxing out their credit cards didn’t have as dire an impact as you might expect, filing for bankruptcy had a very big impact.
Some decisions will affect your score for a short period (such as missing a payment on a credit card), while others could affect your score for years (such as filing for bankruptcy).