Make no doubt about it, unless you plan to live in a treehouse near the beach and live off the land for the rest of your life, you are going to need credit and you will want to have a good credit score. The better your score, the better your chances of getting credit and, in many cases, the better interest rate you will receive. A good score puts you in a stronger bargaining position with the credit provider as they will see you as a good payer and want to grant you credit.
Your credit score is determined by a number of factors and is calculated by a number of credit bureaus in South Africa.
There are six main things they look at when calculating your score. In order of importance and weighting, they are:
- Your Payment History
- Amounts You Owe
- Length of Your Credit History
- Types of Credit Used
- New Credit
- The age of your accounts
These give you some idea as to what you need to do to avoid a bad score or maintain a good score.
1. Have active credit agreements
While it is great to be debt-free and not owe people money, it will count against you and lower your score. You need to have credit agreements in place in order for the bureau to determine how well you handle these agreements.
If you do not want credit immediately but want to establish a good credit track record in order to have a good score, get a credit card or two. You can use them for a range of purchases and pay the full amount due every month. That way, you will not pay any interest and the card fees are a nominal, annual fee. This will reflect positively on your credit rating and could also earn you valuable points on one of the many lucrative rewards programs that are linked to credit cards. You could do the same with a store card and make purchases on the card and simply pay the full balance every month.
Without a payment history, it is impossible for a credit bureau to determine your payment habits.
2. Pay what is due on time
Those lending you money or granting credit of any kind want to see that you pay your current commitments on time, every time. This shows that you are a responsible payer and is the single best thing you can do to have a good credit score.
Always pay the full amount due and make sure the payment is on time. Even a day or two late here and there will impact your score negatively. Having a debit order in place makes this easy. If you do not receive your invoice for whatever reason, it is your responsibility to find out what is due and pay it on time.
3. Have long-standing accounts
The length of the credit agreement has a big impact on your credit score. You cannot create a good score overnight by taking on a few credit arrangements and paying one or two installments. They want to see a regular, consistent payment over a period of time so the older the account is, provided it has been handled well, the better your score will be.
Do not take on a number of new credit agreements in order to increase your score as this will not help and could well have a negative impact on your score.
4. Limit the amount of credit you use
The amount of credit available to you in relation to the amount you have used is another important factor that will impact your credit score. It is also known as your credit utilization ratio. You do not want your repayments to exceed 20 to 30 percent of your income. The same figures are true of your credit usage. In other words, if you have R 100 000 credit available, try to keep your outstanding balance between 20 and 30 percent of that figure.
5. Avoid missed payments, defaults, judgments, and admin orders
Any one of the above will have a devastating effect on your credit score and will often preclude you from getting credit altogether. If you find yourself in a position where you are not able to meet one or more debt installments, contact the credit provider immediately and keep in regular contact with them. Many times, they will be able to restructure the debt in such a way that makes it more manageable. Whatever you do manage to arrange, ensure you stick to the new agreement. Proactively dealing with the companies can prevent the debt from becoming a default or judgment. Ignoring it will only lead to disaster. A default will stay on your credit record for up to 5 years and even if the rest of your credit behavior has been exemplary, this one lapse will drop your score and remain a concern for credit grantors.
If you find yourself in such a situation, even if you know it is only temporary, take a look at where you can either increase your income or reduce other expenses in order to service the debt. Doing without pay-TV for a few months or not dining out now and then for a while is a much better solution than ruining your credit score.
Credit is a necessary part of modern life. If managed correctly, it is not a bad thing. Very few people are in a position to buy a house or a car for cash. In such cases, your credit score will be extremely important. Spend and borrow responsibly, pay what is due diligently and live within your means. This way, you will have less stress in your life and you will always have access to credit should you need it. You will also be more likely to get any credit that you need at a preferential interest rate which will save you money.
