If you plan to purchase a home, get a credit card, and access a student or personal loan – even opening or growing a business – you will need a good credit score. You have probably heard of credit scores before. But because there’s not that much information available about how it works and why it’s necessary, most people don’t understand it.
However, this will guide you on everything you need to know about credit scores and help you confidently navigate this territory.
What is a Credit Score?
Credit bureaus use reported payment and credit-account information to produce credit reports and scores. Scales and category boundaries differ by bureau and product, so always check the explanation accompanying the particular score you receive.
Your credit score also reveals your credit health and worthiness to future financial service providers. So this number – among other things like your debt to income ratio – determines if you get access to finances or loans.
Your credit score will also determine how much you spend on interest rates and what type of credit facilities you can apply to.
How to Get a Good Credit Score
As much as possible, you want a near-perfect credit score to ensure you’re able to access better interest rates and better credit from financial service providers. The trick is to understand what you can do to improve your credit score or, if you have a good credit score, what you can do to maintain it.
Get A Copy of Your Credit Report
Step number one to improving your credit scores is to get a copy of your credit report. Your credit report will give you an in-depth look at your credit health as well as your credit score. This should help you by giving you a starting point and help you plan what to do next.
You can get your credit report from one of South Africa’s four main credit bureaus. You’re entitled to a free credit report every year from each of the credit bureaus.
Fix Your Negative Listings
If you have negative listings – like return unpaid or overdue notices – you should try correcting those errors, either by paying what you owe in full or making arrangements with any creditors. Alternatively, if you notice an error, contact the credit bureau to rectify it.
Reduce Your Credit Balance
Your outstanding debts can have a significant impact on your credit score, dragging it down the more it is. This is because lenders treat your credit balance as a risk assessment, showing them if lending to you is a good idea. If you have taken out too much credit – and most of it still needs to be paid back – you become a riskier client. Remember, even if you don’t pay late or skip payments, having a high credit balance will lower your credit score.
Pay Your Instalments on Time and In Full
When you pay your instalments late or partially pay, it signals to the credit bureaus that you are unreliable, increasing the risk associated with your credit profile and lowering your credit score.
Avoid Unsecured Debt
Unsecured debt can be everything from your credit cards, outstanding rates and municipal bills, store cards, and personal loans. Secured debt is the debt that is fixed to an asset like a car or home. Because unsecured debt isn’t linked to any assets, it carries high risk, which is why having too much brings down your credit score. So wherever possible, try to avoid taking out unsecured debt as it will affect your credit score.
Don’t Make Too Many Credit Applications.
Since financial providers have to report every credit application, your previous credit applications all make it onto your credit report. They then reveal whether you’ve been declined, accepted, or whether the application was closed.
If you make too many credit applications in a short space of time, this indicates to credit providers that you may be at a higher risk of default, lowering your credit score as a result.
Close Your Unused Credit and Store Cards
An unused card with a zero balance is not an outstanding debt. Closing it may change your available credit and utilisation ratio, so do not assume that closing every unused account will improve your score.
What Is a Good Credit Score?
There is no single set of score categories used by every South African bureau. Read the following labels as general descriptions, and consult your bureau’s current scoring guide for its numerical bands:
- Excellent: the highest category in the relevant bureau’s scale
- Good: a category defined by your bureau’s scoring model
- Favourable: a label used by some scoring products
- Average: a label whose meaning varies by scoring product
- Below average: a product-specific description
- Unfavourable: a product-specific description
- Poor: the lower category or categories in the relevant scale
A score should be interpreted using its own scale. A number such as 700 is not a universal threshold for approval or a good score across all scoring models.
Minimum Credit Scores for Loans
There is no universal score of 500 that guarantees a loan. Credit providers use their own risk criteria and affordability assessments, including income, expenses, existing debt and credit history, when deciding whether to lend and on what terms.
But before you apply for a loan with a low credit score, be sure the lender you’re approaching will accept your credit score.
What is a Good Credit Score if You Want to Buy a House?
A score of 640 does not guarantee a home loan, and 750 does not guarantee a particular interest rate. Banks assess their own credit-risk score alongside affordability, income, deposit, liabilities and the property.
Also Read: Pick n Pay Credit: Everything you Need to Know
How to Improve Credit Scores, South Africa
If you want to improve your credit scores in South Africa, there are three categories you can focus on.
Making Arrangements With Lenders You Can Keep
If you’re over-indebted, don’t overwhelm yourself with trying to pay back large sums monthly. Rather, contact your credit providers and make reasonable arrangements that you can payback.
Removing Negative Listings
Before you put in additional time and money, ensure your efforts aren’t going to waste by contacting a credit bureau and checking to see if you have any negative listings and removing the listings that don’t reflect your current arrangements.
Avoiding Taking Out Any More Unsecured Debt
If you are interested in improving your credit score and all the benefits that it has to offer, you should avoid taking out any more unsecured debt. The biggest offenders are store cards, personal and payday loans. Even if you’re in a pinch, look for other alternatives before taking out credit or a loan so that you can improve your credit score.
Improving your credit score takes time. If you have a low credit score, it could take a year or two – maybe longer, depending on how much debt you have – to improve it. But your primary focus should be to remain focused and take the small steps you can.
