Understanding your credit score

Jul 19

Understanding the ins and outs of your credit score is important for your financial wellbeing. Whether you are an average joe or a financial guru, understanding the good and bad of credit allows you to effectively manage your finances and secure your financial independence. In this blog, we will look at the elements that influence your credit score as well as the rules of thumb that you can apply to improve this score.

Why should you care about your credit score?

Now, you might be wondering, is it really necessary to care about your credit score and stay informed regarding your status? Absolutely. Your credit score affects a variety of components in your financial life including your success in applying for things like a home loan or other forms of credit. In fact, your credit score is your financial identification number as far as creditors are concerned and, if you have a good score, you will almost always qualify for the best interest rates and pay lower finance charges on credit card balances and loans.

What does your credit score mean?

A common misconception is that a lack of credit makes for a good credit score. This, however, is incorrect. By using credit, and having a good score, you are providing banks with evidence of your financial fitness or ability to correctly manage your finances. So, you must use credit in order to have a score which falls between 300 and 999. In order to have a good credit score, i.e. one that is above 720, you should ensure that all your installments are paid in full and on time. A bad credit score is anything below 620, which means that creditors will see you as a risk although this credit interpretation can vary from lender to lender.

What influences your credit score?

Your credit score is influenced by a number of factors. These factors include your payment history, the length of your credit history, your total balance or outstanding payments, the amount of credit used and available, as well as your recent credit behaviour like the amount of new credit requested. Once you understand this composition, you can develop a roadmap for improving your credit score. In fact, we have mapped out a few tips for you below.

Rules of thumb to improve your credit score

Rule one: Know your credit status

South Africans are entitled to one free credit check per year.
Ask for the report in full and remember that some reports from certain lenders may contain errors so do go through the report in detail.
You can check your status at your financial provider or online here.

Rule two: Keep credit inquiries to a minimum.

Every time a credit check is performed on you it affects your credit score.
For this reason, avoid applying for credit while you are in the process of improving your score.

Rule three: Don’t use it? Lose it.

Well this may seem in conflict with the earlier statement about the value of a having a good credit score, it stands that the less credit lines you have against your name, the lower the risk you are towards lenders.
Close unused credit accounts and ask providers to inform the credit bureau that you have closed these accounts of your own accord.

Rule four: Avoid opening too many accounts

If you are new to credit or want to open a new account, do not open more than one in rapid succession or at the same time.
Additionally, avoid moving your debt from one account to another as this can negatively impact your score.

Rule five: Use credit responsibly

Make sure that you pay your credit on time and in full each month as this will demonstrate your financial fitness to banks and show that you are capable of correctly managing your finances.
If you are worried about making payments on time, set up monthly debit orders to ensure that you do not miss a payment.

Rule six: Give a little extra

It seems pretty obvious that you should pay your installments on time and do so in full.
However, it would be wise to go one step further and pay more than your installment if possible.
This will not only settle your debt at a faster rate, and save you money in regards to interest, but will also look good on your credit report.

By applying these rules of thumb and informing yourself of the ins and outs of credit, you can ensure that you are able to successfully plan for your financial future as well as the future of your loved ones.