WHY YOUR CREDIT SCORE MATTERS

Does your credit score even matter? Yes, it really does! Find out why it’s so important, and how to keep your credit record clean

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Your credit score may be the three most crucial digits in your financial life. At least, that’s how Amelia de Milander, marketing manager at DebtBusters, puts it. Other financial experts have likened it to a barometer that measures your financial health, or to a financial GPS that guides lenders when navigating the risks of lending you money.

Clearly, those three digits that form your credit score hold a lot of power. They can contribute to whether you qualify for a personal loan, cell phone contract, home loan or car finance – and how expensive the overall repayment will be. Some employers and landlords check your credit score before offering a job or rental agreement.

“Knowing your credit score strengthens your negotiating position as you have access to the same information as lenders,” says Amelia. “It’s a powerful tool to use to your advantage.”

WHAT IS A CREDIT SCORE?
It’s the three-digit value that represents somebody’s credit- worthiness, based on their credit history. Lenders use it to calculate the risk of whether you will pay back the borrowed money – in full, plus interest and within the stipulated time, based on your past financial behaviour.

In South Africa, credit scores typically range from 300 to 850. Each credit bureau uses slightly different scoring models. Global information services company, Experian, uses this model:

• Excellent: 700+
• Good: 656 – 699
• Fair: 528 – 655
• Poor: 0 – 527

The higher the credit score, the lower the risk that you will miss payments. For you, this also means lower interest rates, better access to credit and options for the financial institutions you decide to borrow from. For example, home loan comparison service Ooba suggests that your credit score should be at least 610 when applying for a home loan in South Africa.

KNOWING YOUR CREDIT SCORE STRENGTHENS YOUR NEGOTIATING POSITION AS YOU HAVE ACCESS TO THE SAME INFORMATION AS LENDERS

HOW IS IT CALCULATED?
Your credit score considers how well you pay your bills and instalments (do you pay at least the minimum instalment on time?), how much debt you owe in total, and how long you’ve held credit accounts. It also looks at how many and what type of credit accounts you have, such as credit cards, store cards, loans and bonds.

Another factor is how often you apply for new credit, and whether you max your credit limit. Watch out for defaults on loans or credit cards, for collections accounts, judgements or bankruptcy, as this will significantly lower your credit score.

HOW TO CHECK YOUR CREDIT SCORE
By law you can access your credit record and score once a year for FREE at South Africa’s major credit bureaus. Visit their website or call them:

TransUnion: transunion.co.za
0861 482 482

Experian: experian.co.za
0861 105 665

XDS: xds.co.za
0860 937 000

GOOD VS BAD CREDIT
As a rule, any credit that provides a ‘return on investment’ – and that you can pay back in the stipulated time – is considered good. Examples include using credit for buying a house or car, furthering your education or building a business.

In contrast, credit for lifestyle choices (such as vacations, luxury technology or dining out) or to cover your daily living expenses (groceries, rent or electricity) is considered bad credit, as they could plunge you into debt quite quickly. 

“When credit becomes a burden, it’s considered debt and could become problematic for your financial health,” says Amelia. “If you’re spending 40% or more of your salary to pay back your creditors every month, you’re at risk.”

If you are struggling to make repayments, there are ways to get back on track but you do need to speak to an expert who will be able to advise you on how to manage your existing debts and lower your instalments.

HOW TO (RE)BUILD YOUR CREDIT
Improving or building your credit score takes years, so start taking it more seriously today, if you haven’t already. Beware of scams that promise quick credit fixes.

“The best way is ensuring your bills and repayments are paid in full so you don’t fall behind,” says Amelia. “Your credit agreements will each stipulate the minimum amount you must pay back monthly, and the dates. You need to keep up with that to ensure a healthy and high credit score.”

IF YOU SPEND 40% OR MORE OF YOUR SALARY TO PAY BACK YOUR CREDITORS EVERY MONTH, YOU’RE AT RISK OF A POOR CREDIT SCORE

She suggests the ‘snowball method’ for those able to pay above the minimum monthly amount: “Simply put, it means you pay off the smallest loan you have as quickly as possible. Then you can use that extra money to pay toward the next smallest credit agreement.”

If you’re at the beginning of your financial journey, store cards will help create a good credit history – provided they’re paid on time and you stay roughly 30% under the credit limit offered to you. Get advice from a registered financial advisor about more ways to (re)build your credit.

If you’re temporarily financially stressed, always communicate with your creditor to revise your payment plan. If your debt is overwhelming, consider debt counselling.

Ultimately, checking your credit score, and understanding those three crucial digits, is a great starting point for achieving financial health.

By Silke Colquhoun
Illustration & photo: Gallo/Getty Images