Article by Debt Rescue
We weren’t born with a credit score. In order to get one, you need to get into debt first. And, once you’ve taken the plunge, it begins to get a little tricky.
This little score will follow you around for the rest of your life. It can impact you negatively or positively, depending on how well you manage your debt.
Understanding Your Credit Profile
What exactly is a credit profile? And how do you check your own?
In simple terms, a credit profile is a summary of how good you are at paying your debts and managing your credit. If you’ve missed any payments, gone over your credit limit or had any judgements against your name, it will lower your score. If you pay your bills on time, keep your balance low, and regularly use your account, your score will go up.
All credit providers will use your credit profile to decide whether they will lend you money or not.
Your credit score is made up of 5 parts:
What is a good credit score in South Africa?
A good credit score is an asset. It means buying your dream home at an affordable rate. Driving a nice car. Getting a decent loan to start your own business. So, it’s worth looking after it.
South Africa’s average credit score sits between 500 and 600. A good credit score for a South African is 650+.
The good news is, even when times get tough and your score drops, it can be improved. All it takes is time and some good behaviour.
Get Your Free Credit Report
All South Africans are entitled to a free detailed credit report once a year. You can get your report from any recognised institution such as TransUnion or Experian. If you want to keep an eye on your monthly updated score, you can sign up to Clear Score, Finance Man, or Credit Sesame.
How to Increase Your Credit Score in 5 Steps
If you want to increase your credit score, you need to focus on the five factors that make up your score. Remember: it’s not possible to change your score overnight. Your credit score will only increase gradually over time.
Let’s dig in:
1. Keep up with repayments
Payment history makes up 35% of your credit score. Late repayments can remain on your credit report for 7 years. Ouch! How much your score drops depends on how late it was, how much you owe, and how often you miss repayments. But it often varies between 60 to 110 points.
Those points make a big difference.
If you have ever missed a payment in the past, try and remove it from your report. If you only missed one payment with a credit provider, ask for a goodwill adjustment. If that fails, try and negotiate by offering to set up automatic payments in exchange for the removal of your late repayment. If you can’t remove late repayments, you’ll have to be patient and let it age off your report.
2. Get your account balances down
Amounts owed make up 30% of your credit score. If you want to improve your credit score quickly, you’ll have bring down the amount you owe on each of your revolving accounts (such as your credit card or store account).
Those who have a credit score of 650+ and above usually don’t owe more than 20% of their balance. Those who have a score between 550 and 600 owe at least 40% of their balance.
It’s no brainer when you want to get those extra easy points.
3. Keep your credit accounts open and use them regularly
Length of credit history makes up 15% of your credit score. Always leave a small balance on your account each month and keep your accounts open for as long as you can. If you are clever with your credit and keep your balance below a certain amount every month, your credit score will quickly improve. Remember, it’s not a good idea to have credit accounts open that you don’t use as this will also lower your score.
4. Avoid opening too many new credit accounts at once
New credit makes up 10% of your credit score. When you open a new credit account, your score will automatically drop. This is because new credit accounts have no payment history. You score works on an average of all accounts and a new account will drop your average.
5. Show you can manage different types of credit
Types of credit used make up 10% of your credit score. As we discussed earlier in this article, most of us have two main types of credit available to us; revolving and instalment. We like to call this our “credit mix”. It is good practice to have both types of credit on your report. It will show lenders you are less of a credit risk. This is because instalment loans such as car finance, often require set monthly repayments that often last several years. Your ability to pay and maintain this type of loan shows how trustworthy you are as a lender.
Credit is an important part of life, but managing it properly is key. Your credit score is like a delicate plant. It doesn’t grow overnight, and it needs a whole mix of things before you can reap the fruits of your labour.
Take the time to understand your finances and work well with them. Otherwise you may end up in a very difficult situation financially.
The debt trap and your credit score
Yes, debt is part of life and without it you wouldn’t even have a credit score to worry about. But of course, there is a catch.
If your over indebted, it can be very difficult managing your credit. No matter how hard you try, you always end up with late repayments. Your credit limited is continuously maxed out. And you never have enough money left over after your repayments to pay for living costs. If you are at this point, remember you are not alone. Services like debt counselling are designed to help those who can no longer manage their debts.
If you feel you are over indebted and can no longer manage your credit, get in touch with Debt Rescue today to discuss your options.