Your credit score is a critical indicator of your financial wellbeing and an important reference point for potential lenders who have to assess your creditworthiness before granting you a home or car loan, selling you a mobile phone contract, increasing your credit limit on your credit card or providing you with a student loan.
The scoring models used by credit bureaux vary, but the big multinational companies such as Experian and TransUnion score consumers on a scale of 0 – 999, with 600 being satisfactory (borderline when it comes to landing a home loan), and anything over 800 being excellent.
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TIP: CHECK YOUR You can apply for your credit report including your score and a summary of your credit history free of charge once a year from all credit bureaux. You can also access a number of credit reports through a single provider, or you can sign up, at a fee, to receive regular updates on your credit report. You will find a list of credit bureaux on the National Credit Regulator’s website here. |
The South African credit bureau ClearScore operates on a smaller scale, between 0 and 700.
If your credit score is low or borderline, it is probably the result of various factors, and there is no quick fix. The good news is that you can change your approach to credit, and improve your score over time.
The factors that affect your score
First you need to understand what information goes into your credit report and how it influences the eventual (and ever-changing) score.
Five factors are weighed up (listed in order of importance):
1. Your payment history
How regularly you make payments over time accounts for more than a third of the points in your final score. Just one monthly payment missed will drive down your score.
2. How much you owe overall
This is only slightly less influential than your history. Key to this assessment is how much you are using of the credit that is available to you.
If you max out your credit card(s) and other forms of revolving credit most of the time, it will reflect negatively in your credit score. How long it will take to pay off your debt is another important dimension of assessing your capacity for more, even if you are not defaulting on payments.
3. How long you have been using credit
If you have had unbroken access to credit for many years it will reflect positively in your credit report and score.
Linked to this is the average length of time you have had your credit accounts; a few accounts that have been active for a long time suggest consistency, stability and reliability, compared to a succession of short-lived accounts.
So avoid opening credit accounts just because you can; a few new accounts acquired within a short time will quickly lower the average length of your accounts and, consequently, your credit score.
4. The types of credit you have
Successfully managing different kinds of credit – for example, a home loan, a car loan and a credit card – is good for your credit score… but don’t take on credit you don’t need just for the sake of it.
5. Recent credit checks
Inquiries by credit providers are recorded in your credit report, so be aware that if you apply to more than one provider they will be aware of your applications to the others. It will suggest financial stress and is likely to affect your score negatively, at least briefly. Applications should be rare to indicate restraint and order in your finances.
Improving your score
From this set of priorities, you may have a good idea how weak or strong the score is that is circulating in your name, even without seeing it. If you suspect that it is less than ideal, or have been refused credit, get your free record and score. Then follow this guidance from the credit bureaux themselves:
1. Pay in good time
Pay every instalment of every debt in good time. Just one missed payment will affect your credit score. Better still, pay more than the minimum if you can. Draw up a budget for paying off your debt as quickly as possible and then stick to it.
2. Manage the amount of credit you access
Analyse your spending on credit and refuse credit cards offered by retailers. Restrict yourself to one credit card and refuse offers from your bank to increase your credit limit.
3. Use credit wisely
Go into debt only for big-ticket items that you cannot do without, such as a home, a car, education and unexpected medical costs. Before buying an appliance on credit, work out how much it will cost with interest and then decide whether you really need it now or whether you can save for it. Read more: How do I know the difference between good debt and bad debt.
4. Pay the debt in your own name
Make sure that repayments you are responsible for are made in your name rather than paid by anyone else, so that your credit record reflects them.
5. Keep proof of payments
Keep proof of all your payments so you can correct errors. Access your credit report and look at it carefully; mistakes can be made during the information transfer from credit providers to credit bureaux. Incorrect information can be challenged and reversed. If you have been a victim of identity theft this is another hazard that could reveal itself in your credit record. Be sure to report identity theft to the South African Police Service and the company, bank or financial institution where the fraud occurred. Also, apply for a free listing with Southern Africa Fraud Prevention Service (SAFPS) alert banks and credit providers that your identity has been used.
6. Apply for credit infrequently
Be cautious about applying for credit. Too many credit checks by providers could indicate that you are struggling financially or are not taking credit as seriously as it deserves to be taken.
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