EXPERT ADVICE TO IMPROVE YOUR CREDIT SCORE

The words 'credit score' leave most people feeling uneasy. Never fear! We have some useful hints that'll help you use credit to your advantage.

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When it comes to significant purchases such as a car or a home, applying for a student loan, or even getting a credit card or a cellphone contract, a solid credit record is crucial. Lenders need assurance that you are a reliable borrower before they agree to lend you money.

Without a credit record, you won't have a credit score, making it impossible for lenders to assess your credit risk and consider you for loans. Having a credit score is the only way to qualify for credit.

By starting with small loans that are easily accessible and responsibly paying them back, you build a good credit score for future bigger loans.

Types of credit
There are two types:

Secured credit. This involves borrowing against an existing asset like a car or a property. Unsecured credit. Examples include store cards, credit cards and personal loans.

Regardless of the type of credit, you must complete an application with the credit lender, who will evaluate your creditworthiness before deciding whether to approve your loan.

What’s more, your credit history also influences the interest rate you’ll receive when repaying the borrowed money. As a general rule, the healthier your credit history, the better the interest rate.

Assessing your credit risk
Lenders categorise borrowers as either ‘low risk’ or ‘high risk’ during evaluation. A high credit score indicates low risk, while a low credit score implies high risk. Many people hesitate to take out loans or get credit cards because they fear falling into debt. However, there is a distinction between ‘good debt’ and ‘bad debt’.

Good debt can enhance your net worth and improve your quality of life, while bad debt occurs when you borrow money for consumption or to buy assets that depreciate quickly. Practising good debt management depends on your financial circumstances and fostering a healthy relationship with money and cash flow.

Monitoring your credit score
How do you know where you fall on the risk table? Look at your credit report. According to the law, all South African citizens are entitled to one free credit report per year from registered credit bureaus like TransUnion, Compuscan, Experian and XDS.

Additional reports can be obtained from these bureaus for a minimal fee. ClearScore also provides free credit reports.

Credit score ratings
Understanding your credit rating is crucial: Excellent credit A score of 650+ makes you an ideal candidate for credit with very low interest rates. Very good credit Scores of between 600 and 650 grant access to excellent loan programmes and offers at favourable rates.

Good credit With a score of 550 to 600, you can secure good deals at reasonable interest rates. Sub-prime Candidates in the 490 to 550 range may face difficulties obtaining loans and incur higher interest rates.

Poor credit Individuals scoring 490 and below may not qualify for loans at all. Their main focus should be improving their credit score (see right).

What credit bureaus look at when calculating your score
Credit bureaus consider several factors to determine your creditworthiness:

– Payment history
– Amounts owed
– Age of accounts
– Judgements and defaults
– How often your credit report has been requested by credit providers.

Tips for improving your credit score
All is not lost! There are a few steps you can take to gradually improve your credit score. It’s important to note that your credit score is not set in stone, and it can vary depending on the scoring methods used by different financial institutions.

Here are three top tips to help you improve your credit score:

1. Always pay your bills on time and avoid missing any payments. Timely payments demonstrate responsible and reliable behaviour, which makes you appear less risky.

2. If you have taken out significant loans, it’s essential to have a solid repayment strategy in place. Consider debt consolidation services if necessary, which can help you manage your debt repayments more effectively.

3. Adopt healthy spending habits and take responsibility as a consumer. Try to limit unnecessary expenses as much as possible and be mindful of your financial choices. By being more accountable and making wiser decisions, you can positively impact your credit score over time.

Remember, improving your credit score is a gradual process that requires consistent effort and responsible behaviour. By following these tips, you can take big steps towards achieving a better credit standing.

Words by: Charndre Emma Kippie
Photograph: Gallo/Getty Images