Credit. It’s like water. Freely available for us to use but, for the most part, taken for granted until there’s a crisis. That is, you’ve ruined your credit rating (or credit score). Now no reputable credit company will trust you. What to do, what to do…
What Is My Credit Rating, and How Is It Calculated?
Senior data analyst at credit bureau Compuscan, Jacobus Eksteen, said that South Africans generally do not have great credit scores.
A credit rating is a number, between 300 and 850, that summarises for creditors how risky you are to lend money to. It’s your ‘financial CV’ that indicates to lenders how likely you are to honour future commitments. i.e. your creditworthiness.
The lower the score the higher the interest rates you’ll be charged on credit cards, personal loans, home loans, motor finance, even insurance as some studies are indicating. Anything above 740 and you’re in the ‘excellent credit’ category of consumers who get the best deals on low interest rates.
But a bad credit rating doesn’t only affect interest rates, it could stop you qualifying for credit at all. This means when you’re able to afford a home, you may still be declined based on negative credit behaviour. The good news is: change your behaviour, change your score.
How To Improve Your Credit Rating
1. Pay Your Bills On Time
This sounds so simple but you’ll be amazed at how many people have a history of ‘slow payments’. They are under the misconception that as long as they pay, even if it’s a week late, it won’t affect their credit rating. This, however, is the most important factor in determining your score – your payment history. Ensure you pay on time, every month.
2. Don’t Max Your Credit
The general rule
is; use less than half of the credit available to you. But utilising less than 30% of your credit limit is even more ideal.
The second more important, amount owed, is a little more complicated. It looks at how much you’re using of the total credit you have available – also known as your “utilisation ratio.” Lenders believe that borrowers who are close to maxing out their credit are more likely to miss payments.
3. Make More Than One Payment Per Cycle
Another misconception is that it’s perfectly fine to pay only the minimum amount owing on a credit account. This practice will hurt your score. Rather pay the principle plus interest every month, and if your payments are automated, manually pay a little bit on top of that before the next payment is due regularly for an extra boost.
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4. Check Your Credit Report
South Africans are entitled to a free credit report every year from each of the two major credit bureaus, TransUnion and Experian. But every year, only about 1.6% of us request these reports. That leaves 98.4% of SA consumers who possibly have no idea what their credit rating is, or if any mistakes were made that could be unnecessarily damaging your credit score.
TransUnion, in an effort to help South Africans understand and manage their credit, has launched an SMS service that allows consumers to get an overview of how creditors view them.
5. Get Credit…
It seems counterintuitive, but if you don't have any credit accounts, how do you build up a credit history? Your credit score is literally based on your how you’ve handled the credit you have – so get some, and show those creditors you’re worth betting on.
6. …But Not Too Much At Once
Opening too many accounts at one time will also lower your credit score, as well as having too many similar accounts. So leave a few months (say, six months to a year to be safe) between applications, and get a good mix over time. i.e. A retail account, student loan, and car finance). It’s a good indicator that you can manage different kinds of accounts responsibly.
7. Don't Close Your Good Credit Accounts
The length of history of your credit account is another big factor for creditors to determine your creditworthiness. Credit unions look at the average age of your accounts, and how long it’s been since you’ve used them.
Even if you’ve defaulted on an account in the past, start changing your payment behaviour for the better and it will better your score. Many people mistakenly believe closing an account erases the bad credit behaviour on that account. “It’s taken into account for up to five years, depending on the credit bureau,” says Eksteen – this is regardless of if it stays open or is closed. If you close it your good behaviour, however, will be gone forever.