Bank Better, Live Better

The Credit Boot Camp part 6: Practising good credit behaviour

In this instalment, we’re going to share some tips on how to keep your credit score in good shape.

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Good credit behaviour improves your financial life. It shows your bank, landlord and even employer that you work responsibly with your money and take ownership of your credit activities.

5 good credit behaviours

Your credit score is kind of like a financial CV: it shows credit providers how good (or bad) you are with credit.

A credit score is usually made up of 5 parts:

Practising good credit behaviours

Let’s unpack those a bit more.

Your payment history

This constitutes 35% of your total credit score. And late payments can remain on your credit report for up to 7 years. How many points can you lose for late payments? It varies because credit bureaus can have different ways of calculating it, but usually it’s between 60 and 110. Over time these can be the difference between a good and bad credit score. Make sure you pay all your instalments on time and in full every month. Missing a payment or paying less than the minimum amount will have a negative effect on your credit rating.

How much money you owe

Any money you owe makes up 30% of your credit score. Credit providers look at the total amount you owe on all your loans to see how much you’ve already repaid and how often you use credit. Want to improve your rating in a hurry? Don’t max out your credit limits! People who have a credit score of 650 and above (that’s the number you’re aiming for) usually don’t owe more than 20% of their balance. People who have a score of between 550 and 600 owe at least 40% of their balance.

The length of your credit history

This makes up 15% of your score, and the longer your credit history, the more information is available about you. This gives credit providers a better picture of your long-term credit behaviour. It will be in your favour to start building your credit score as early as possible. You can do so by taking out a credit card or prepaid cellphone contract and pay it timeously and in full every month. Avoid having open credit accounts you don’t use, as this will actually lower your score.

New credit you’ve taken on

You’ve probably heard that to get credit, you need credit. Well, new credit equals 10% of your score. But every time you open a new credit account, your score drops. Why? Because these accounts have no payment history and your score works on the average of all accounts. So, never open a spate of new accounts, as this will work against you by dropping your average. It also tells credit providers that you might be in financial trouble and need to rely on credit to survive.

Types of credit you have

The types of credit you use make up 10%. Having a variety of credit options, such as a credit card and personal loan, shows you’re able to manage different types of credit and that you’re less of a risk. The reason? An instalment loan, like car finance, has set monthly repayments over a number of years. Paying and maintaining this type of loan shows you’re trustworthy and responsible when it comes to credit.

Real-life lessons

“I definitely learned the importance of good credit behaviour the hard way,” says Financial Fitness Bunny, Nicolette Mashile. “My first credit card came with a R500 limit. I maxed it out in one shopping spree. I paid what I owed when I could, but I eventually stopped paying altogether. No one told me I had a responsibility to pay, and to pay it every month. I thought I’d gotten away with it until years later, a debt recovery agency came knocking at my door.”

Mashile didn’t realise how not taking ownership and being responsible for her credit behaviour would mess up her credit record. Eventually you have to pay back all the money with all the interest and other costs it accumulated.

However, after this setback, she has learned that the better your credit score, the better your chance for credit approval, lower interest rates on a loan; and being approved for higher amounts if you need it.

What about if you forget to make a payment one month or are occasionally late? “That’s usually not a problem and isn’t likely to affect your credit rating,” says financial journalist Maya Fisher-French. “It’s when your credit history shows a regular pattern of late or non-payments that your credit rating is negatively affected.”

Make credit part of your overall financial plan

Review your credit report regularly

You need to make this part of your financial plan. Make sure you review your credit report once a year, so you can check your credit score and know what to improve on. Legislation entitles South Africans to obtain a credit report free of charge from every credit bureau once a year. You can do this online.

Set a budget

If you haven’t done this yet, now’s the time. You can use this handy online tool to get started. “The most important and basic thing people should do when it comes to managing money is budgeting. That’s your money plan. If you don’t plan, you plan to fail,” says Mashile.

Check your interest rates

When it comes to debt, it’s a good idea to pay off the loan that has the highest interest rate first.

Budget 20% of your income for lifestyle spending

“You work hard day in and day out, so it’s important to reward yourself,” says Mashile. By following the 20% rule, you can save and splurge without blowing your budget.

Set specific financial goals

Fisher-French recommends setting financial goals. You should be specific and attach numbers and dates to your money goals.

Ask yourself these questions and answer them:

  • How much debt do I want to pay off? By when?
  • How much do I want saved? By when?”

Get a Capitec credit card

You can use your credit card to book your next Airbnb stay, catch an Uber, shop online and be prepared for emergencies. Apply today.

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