A credit score is a simple way of showing whether a person knows how to manage their credit. It’s almost like a financial CV that gives credit providers information on how well you have, and currently are, managing your loans.
Having a good score will not only help credit providers approve your application, but also get you the best rates.
Your credit score is calculated by looking at your past and current credit behaviour, which is listed in your credit report and available at credit bureaus.
The following factors affect your credit score:
1. Your payment history
Pay your accounts on time and in full. On-time payments show that you are trustworthy and willing to pay off your debt as agreed with the credit provider. Missed or partial payments will, however, have a negative effect on your credit score and will remain visible on your credit report even after you eventually manage to pay off your loan in full.
2. Your credit balances
Keep your credit balances low. Credit providers look at the total amount you owe (balance outstanding) compared to the original loan amount or credit limit. This is to see how much you have already repaid and how often you use credit (in the case of revolving credit).
3. Length of credit history
The longer your credit history, the more information is available about you and the better the picture of your long-term credit behaviour.
4. New credit
Don’t open too many new credit accounts at the same time, as this could suggest that you are in financial trouble or that you’re trying to buy things you can’t afford.
5. Types of credit in use
Using a variety of credit products show that you are able to manage different types of credit.
- Instalment loans, such as personal loans, vehicle finance or home loans measure your ability to pay consistent monthly instalments because both the amount and the term are often fixed. Also, as you pay off the loan, the amount outstanding gradually decreases
- Revolving credit, such as credit cards and store accounts measure how easy it is for you to manage your budget on a monthly basis, as payment requirements for these accounts vary based on how much was spent in a cycle
Credit providers must do an affordability calculation to see how much money you have left after you’ve paid your financial obligations and deducted your living expenses.
Improve your affordability in the following ways:
1. Manage your income
Know what your monthly income is, how sustainable it is and whether it’s enough for all your financial obligations and monthly living expenses.
2. Reduce your expenses
Look at your money plan and decide where you can cut costs.
- Pay the lowest bank fees. Bank on your phone, pay with your card, and use Internet banking instead of drawing cash or going to a branch
- Close accounts and cancel subscriptions and loyalty programmes you pay for but don’t use
- Reduce spending on non-essential and luxury purchases
- Manage your monthly grocery budget by shopping in bulk
- Pay less for transport by using public transport or joining a lift club
- If you are renting, consider a more affordable place