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 guide on everything you need to know about credit scores will help you confidently navigate this territory.
What is a Credit Score?
Your credit score is a number – given to you by credit bureaus – that summarises your credit report. Every month credit providers send your credit activity to the four major bureaus in South Africa. These include Experian, TransUnion, Compuscan and XDS. The bureaus use the information to determine what your credit score is. Your credit score is a number given to you between 0 and 999, with 0 being a terrible score and 999 being an excellent score.
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 score 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
Unused credit and store cards also add to your unsecured debt amount. So, if you aren’t using a store or credit card anymore, close the card to reduce your outstanding credit balance.
What Is a Good Credit Score?
Your credit score can fall into seven categories: excellent, good, favourable, average, below average, unfavourable, and poor. The numbers associated with these scores are as follows:
- Excellent: 767 – 999
- Good: 681 – 766
- Favourable: 614 – 680
- Average: 583 – 613
- Below Average: 527 – 582
- Unfavourable: 487 – 526
- Poor: 0 – 486
Whether your credit score is good will determine what type of loan or credit you’re trying to access. Even a good rule of thumb is that a good credit score is any number above 700.
Minimum Credit Score for Loans
The minimum credit score for a loan – like a personal loan or business loan – will depend on the financial provider you use. If you don’t have any negative listings (in the form of return unpaid and high arrears), you can get a loan with a credit score of 500. However, in this case, most lenders who are willing to lend to you with this credit score will give you a high-interest rate and a low loan amount. Also, some loan providers may decline your application altogether, impacting your credit score even further.
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?
If you want to buy a house, the lowest your credit score should be is 640. Most banks and home loan companies will approve a home loan application if your credit score is above 640. However, you will still need to make other minimum requirements placed on you by the financial institution giving you the home loan. If you want a lower interest rate on your home loan, you should aim to have a credit score above 750.
How to Improve Credit Score, South Africa
If you want to improve your credit score 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 pay back.
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.