Why your credit score is important
When you apply for a loan the lender will need to make an affordability decision, which influences your likelihood of being approved. To make an affordability decision the lender will take into account a number of different information sets such as your age, employment details, residential situation and so on. For all unsecured loans, your credit score will play a major role in the affordability decision. Banks, payday lenders, personal loan lenders, insurers, credit card issuers and even car retailers decisions will be influenced by a credit score.
What is a credit score?
In the simplest term, your credit score is a prescribed number that indicates to a lender your ability to repay a line of credit.
Who generates your credit score?
Your credit score is generated by a credit bureau or consumer credit reporting agency. These companies collect information on you from a variety of sources that provide a picture of your borrowing and bill-paying habits. The report includes a record of your financial history, personal information, dispute information and account data
In South Africa, there are four main credit bureaus that provide credit scores to prospective lenders. These are; Experian a global brand, XDS who also provide business credit data, Transunion, another global brand and Compuscan who are present across a number of African countries.
What is a good credit score?
A credit score ranges from 330 to 850. Each bureau’s score will vary slightly but the difference in the score should not be significant. The higher score you have the better your credit rating and the higher probability you will have of being accepted for a loan. A higher credit score will also improve the interest rates you pay, meaning lower monthly payments. As a general indicator:
750+ = Excellent Credit: You will receive the lowest rates on the market and other benefits.
720 – 749 = Very Good Credit: You will probably be approved for any loan program you choose.
680 – 719 = Good Credit: You have paid most of your bills on time and performed well with previous loans. You will likely to eligible for prime financing with solid interest rates.
620 – 679 = Ok Credit: You may struggle to be approved for financing and, if approved, will be offered higher interest rates.
619 and Below = Very Poor Credit: You will struggle to get an unsecured loan and may need to opt for a secured financing option where your assets will reduce the lending risk for the provider.
What if I have a bad credit score?
If you have a bad credit score it means you have not performed well in the past with financial commitments. You may have repaid bills late and/or defaulted on previous loan or credit card payments. You will need to work on improving your credit score before applying for additional lines of credit.
How can I improve my credit score?
Improving your credit score will not happen overnight. Credit Bureaus will need to see a consistent improvement in your overall financial behaviour before your credit score increases. Luckily, there are a few things you can do to help improve your credit score.
- Make sure you repay your existing loan(s) on time and meet the monthly payments.
- Keep up to date with credit card repayments each month.
- Keep on top of your bills and pay them on time.
- If you do need to take out another line of credit, make sure the monthly repayments do not over-extend your finances. Defaulting on payments is not a good idea.
- If you are struggling to make payments, talk to your credit provider. In most cases, they will work with you to agree on an alternative payment plan that you are able to meet.
- Do not ignore a demand for payment.
- Secured credit cards can be a useful way to rebuild your credit. The money on the card is transferred from your bank account, meaning you are not taking out credit, and the repayments will be reported to the credit bureaus. Meeting payments will reflect positively on your credit score.
What else should I look out for on my credit report?
Your credit score is mostly affected by your previous financial behaviour, however, errors in the information on your account may result in inaccurate scores. When reviewing your credit report, keep the following questions in mind:
- Is all the personal information up to date?
- Have any accounts been opened fraudulently in your name?
- Are any accounts that you closed still reflected as open on your credit report?
- Are any accounts that are still open reflected as closed on your credit report?
If you can answer yes these questions you should contact the credit reporting agency immediately.