- Lenders determine whether you’re creditworthy by accessing your credit score.
- A poor credit score can affect your ability to obtain credit.
- If you are late on a payment, it lowers your credit score.
- A good credit score gives you an advantage, making access to credit easier, reducing interest rates and giving you more financial options.
Factors that influence your credit score
Your credit score is made up of information found in your credit report. This information on your credit report are grouped into five main groups:
- Your payment history
- Your credit utilization
- The age of your accounts
- Judgments and defaults
- Enquiries
What does a low credit score mean?
Credit scores in South African can range from 1 to 1000, and the lower scores indicate less responsible borrowers. If you’ve ever used credit, you will have a credit report, and you have access to one free credit report a year.
When you apply for credit, which may be anything from buying a car using a finance agreement or taking a short-term study loan, the potential lender checks your credit report to determine whether you’re likely to repay your debt on time.
A poor credit score makes it more difficult to access credit products, and you will also pay more interest if your score is low.
Make payments on time, every time
It’s easy to receive a credit report online today and checking it can help you to understand what’s important and make changes to improve your score.
Correct any errors
Your first step is to check for any mistakes. It’s not impossible for errors to be made and simply rectifying them can improve your credit score.
Set up a strict payment schedule
If you don’t pay your account on the due date, it affects your payment history, and this can seriously lower your credit score. You need to make sure that you pay your accounts regularly and on time. Pay strictly according to a schedule, and your score will improve.
Try to pay at least the minimum payment, if not more
You should budget to pay more than just the minimum payment every month. It’s best to pay off as much as you can, rather than as little as you can. Try to minimise the gap between your credit limit and your due amount.
Make arrangements with credit providers
If you’re having difficulty keeping up with monthly payments contact credit providers before they contact you. You may be able to reduce regular payments to an amount you can afford.
Avoid going into ‘default’
If you miss several payments, a lender may place your account into ‘default’. Some lenders only allow you to miss two payments before doing this. Default on a payment and you receive a much heavier penalty than if you miss a payment. Default payments stay on credit reports for five years. It’s never too late to pay back a debt, and it looks better if you pay down a defaulted account rather than not making any attempt to pay it.
Make sure you close old retail accounts
It’s possible to forget about the old retail debt. It may be an insignificant amount, but it can affect your credit score. Make sure all old accounts are settled and closed.
Financial advice
If you’re having real difficulty keeping up with payments, you may need to get advice from a financial adviser who can help you draw up a realistic budget that allows you to meet your monthly obligations in the best way.
The bottom line
Many South Africans do not realise the implications of late payments when it comes to their credit score. It’s only when they approach lenders that they realise how important this credit score is to establish their creditworthiness. A low score means they may not get that home loan, study loan, or vehicle financing. This is why it is so important to be aware of your credit score and to ensure that you make all payments on time on a regular basis.
