Credit score. Credit rating. In all likelihood, you would have encountered or heard one or all of these terms before.

This could’ve been in a conversation or whilst reading something in the financial section of the paper. Maybe you heard it used at school or university.

If you are like most people, you’ve heard the term and know it means something important, but you just aren't very clear on why or how - much like when you hear the term IRP5.

Find out what and credit scores and why they matter in the article that follows and you’ll be on your way to reaching your financial goals.

Is a credit score important?

Allow us to explain exactly what a credit score is and why it’s so important.

First and foremost, often the terms credit score and credit rating are used interchangeably, therefore they mean and refer to the same thing.

A credit score is a number that indicates the likelihood of you paying back credit that has been afforded to you.

You may have different credit scores depending on the credit reporting agency that you're looking at. 

What is a credit score used for?

Lenders such as banks, credit card companies or even stores will look at your credit profile when determining whether or not to give you credit and how much of it to give.

Your credit score allows lenders to determine the level of risk they will incur when they loan you money or give you credit. Additionally, your credit score will also have an impact on the rate of interest lenders may charge you.

What this means then is that your credit score will impact every aspect of your financial life and will influence your ability to get credit. When you have a good credit rating your chances of getting larger credit increases.

So, in essence, your credit score determines if you'll be able to get credit and how much it's going to cost you. The better your credit score the better the deals and rates you will be able to secure. 

What you can get with a good credit score

  • credit cards and store cards
  • home loans
  • car financing
  • cell phone contracts
  • a property to rent

Two of the biggest loans you will ever get are your home loan and your vehicle loan. Since your credit score determines the rate you will get on these loans, you stand to save or lose thousands and thousands of Rands. 

How to build a credit score

By now it should be abundantly clear that, in order to gain credit, you would need not just a credit score, but a good one at that. This poses the question then of how one acquires a credit score.

The answer is fairly simple, you get a credit report/record this report contains your complete financial history including where you hold accounts, your payment history, your total debt amount, as well as, any judgements against you.

What this entails is that you apply for credit of some sort - be it a store account or a cell phone contract (start small), these are the easiest forms of credit to obtain.

How to maintain a good credit score

Once you have a line of credit it is up to you to ensure you pay your instalments each month on time and in full in order to get the best credit history, which allows you to get a good credit score.

Without a credit report or credit score, you do not exist and will not be able to apply for larger forms of finance such as home loans, car financing or business loans.

How to find your credit score

Once you have a credit record you will also have a credit score. You can find out what your score is from credit bureaus such as TransUnion or through sites like Clearscore. You are entitled to a free copy of your credit score once per year. 

What credit scores mean in South Africa

  • 650+ indicates an excellent credit rating
  • 600-650 indicates a very good credit rating
  • 550-600 indicates a good credit rating
  • 490-550 indicates a sub-prime credit rating
  • 490 and below indicates a poor credit rating

It is important to note that a poor credit rating does not determine whether or not you will be afforded a line of credit from new lenders, it only indicates to the lenders what level of risk they incur. The higher your credit rating the greater the chances of you being approved for more credit and lower interest rates.

How people get poor credit ratings

  • Defaulting on loans 
  • Paying loans and credit late 
  • Non payment of any credit agreements including store cards
  • Applying for multiple loans within a short period of time 
  • Closing store accounts and credit cards all at once
  • Fraud and identity theft 

Ways to improve your credit rating

  • Ensure you pay your account instalments in full and on time.
  • Do not open and close accounts often (store and bank accounts).
  • Be sure not to apply for too much credit at the same time.
  • Maintain a mix of healthy credit such as cell phone contracts, credit cards, store cards and car finance or a home loan. By having and repaying lines of credit diligently, you will increase your credit score.
  • Check your credit score annually to make sure you are doing okay.
  • If you have no credit score since you've never taken out a loan or any form of credit you can apply for a loan, credit card or store account to start building your credit.
  • Always get a copy of your credit report and ensure that there are no errors or fraud present as this is very common. Also ensure your credit report has been updated by your creditors. 

Always ensure you review your credit history at least once per annum and make sure that there are no errors and fraud.

Getting the credit agencies to repair errors and remove inaccuracies is quite time consuming so the sooner you get it done the better. Finally, keep credit to a minimum to ensure that you don’t over extend yourself and find yourself in overwhelming debt.

On a final note, we hope this information has been helpful and that you are now more mindful of your credit score, how to improve it and how it directly impacts your life.