A good credit score opens doors; a poor one means you’ll battle to get credit, and even if you do, interest rates may be higher. And at some point, we all need to apply for credit, whether to take out a cellphone contract or buy a car or home.
Paying a lower interest rate saves money, so looking after your credit score makes financial sense. Take charge of your credit score so you can actively manage it. Start by checking your score with one of the many online services that provide free credit reports. Then, understand how credit scoring works and what you can do to keep it in good shape.
Aim for a score over 600
South Africa has four main credit bureaus: Experian, TransUnion, Compuscan and XDS. A lender will request reports from multiple credit bureaus, and what is considered a good credit score may differ slightly between bureaus. According to Benay Sager, executive head at DebtBusters, a score in the upper 600 range is considered very good, and anything below 600 is considered poor.
Credit score calculation
Numerous factors are considered when determining your credit score:
- Your debt-repayment history
- How much of your available credit you’re actually using
- How many accounts you currently have, and how many you’ve had in the past
- How long you’ve had good credit accounts – the longer, the better
- What kinds of credit you have – the mixture of secured (home loan) and unsecured (such as vehicle finance)
- How frequently you apply for new credit – the more often you apply, the more it looks like you can’t make ends meet
- Whether there are any defaults or judgements against any of your accounts
Poor payment history is damaging
One of the quickest ways to damage your credit score is to stop making full payments on your accounts or to fall behind on your installments. Benay suggests that if you have difficulties keeping up with repayments, contact the lender ahead of time so they can restructure the payment plan.
David O’Brien, founder and managing director at Meerkat, believes affordability is a major risk factor when it comes to your credit score. ‘Applying for credit you can’t afford is very damaging,’ he explains. ‘Most consumers understand good and bad credit scores, but very few realise they have to be able to afford the loans they are applying for,’ he adds.
Pay on time
There’s no quick fix to improving your credit score, but paying your accounts on time has the single biggest impact. Late or missed payments are tracked on your credit report, and this harms your credit score. This payment history can stay on your credit report for up to seven years, according to David. ‘To avoid this situation, make a list of all the accounts you need
to pay every month and use that as a checklist when paying, or set up debit orders to automate payments,’ he suggests.
Concentrate on the factors that affect your credit score, as good behaviour will improve your score over time. It’s critical to keep track of your credit usage and avoid maxing out your available credit. ‘Make sure you’re using below 50% of your available credit, ideally less than 30%,’ says David.
Reduce your debts
Aim to be debt-free. Tackle your debts one at a time, starting with the one with the highest interest rate, which is most probably your credit card. David recommends paying more than the minimum amount due if you can afford to. Don’t incur any new credit on the card while you’re paying it off, or you will never clear it.
Once it’s paid, move onto the next account, and so on, until you’ve eliminated all your short-term (expensive) debt. Each debt you settle will bolster your credit score. Close any accounts you’ve settled, as this improves your credit score. Contact the credit provider and request that the account be closed. Simply paying it off won’t close it automatically.
Removing ‘bad reports’ from your credit record
There are different types of ‘bad reports’. Firstly, if you have a judgement or summons on your report, it is because you stopped paying an account, and a lender had no choice but to apply for a judgement against you. ‘Once the outstanding amount is settled, a judgement or summons can be removed from a credit record,’ says Benay.
Secondly, arrears or accounts are also noted on your credit report, and these can be removed once you are up to date with payments.
Lastly, you may see accounts or records that you are unaware of or don’t recognise. Benay advises that in this instance, you work with the credit ombudsman to have these records removed from your credit report. David also adds that it’s important to remember that a ‘bad report’ can only be removed if it’s true.
Stay in control
Managing your credit score is an important aspect of your financial health. If your credit score has taken a dive, don’t despair. Focus on behaviours that will boost it but be patient, as this takes time. Consider debt counselling if you
find yourself in a position of over- indebtedness with no logical way out. ‘This can be the first step in your journey to a clean credit record, so you can start afresh,’ advises David.
Credit union TransUnion recommends that you check your credit score every 30 to 60 days to ensure it’s improving. Benay explains, ‘Regular checking won’t impact your score at all, but it is the most effective way of managing your credit score as it puts you in control.’
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