Author: Nicolas Nel
In the market for a property? The importance of a good credit score and tips to maintain
Buying a new property is as much an exciting decision as it is an emotional one. More importantly though, it should be an informed decision. Amidst all the sadness and stress of 2020, the upswing in first time home buyers is certainly one of the more upbeat success stories. With historically low interest rates, affordability levels have increased allowing more aspirant buyers to finally be able to afford to apply for a bond for their dream home. When assessing home loan affordability, one of the most important things that a bank considers is your credit score. In South Africa, your credit score is determined by your credit report, which in turn contains information about your debt history, how you’ve paid it back, as well as your age and your employment status. This credit report, in simple terms, is a summary of your financial behaviour. It provides a reflection of how well you have managed your debt in the past, thus indicating how much of a credit risk you are likely to be.
Most credit bureaus rate your credit score between 300 and 850. Although different financial institutions may assess credit scores differently, it is generally considered that:
- A low score is anything below 600
- A fair score is between 600 and 669 (although this may vary according to which bank you use)
- An excellent score is anything above 670
The higher your credit score, the healthier your credit is. Having a high credit score means you are more likely to be approved for a credit application – and you are also more likely to get a low interest rate at which you pay it back.
If you find yourself in a situation where you have a low credit score, don’t despair – the good news is that it is possible to improve your credit score relatively quickly. Here are a number of tips from top financial institutions on how to do this:
- Pay your debts and pay them timeously. Having outstanding debt will negatively affect your credit score, while paying it off will improve it. Demonstrating regular debt repayments shows you are able to manage your finances.
- Close all accounts you are not using. The less credit you have against your name, the lower your risk. Creditors assess all your available credit not just the credit that you have used.
- Try avoid owing more than a third of your gross income on debt.
- If you are unable to pay the amounts due on your accounts in full, call the creditor to make arrangements that you possibly pay lower instalments over an extended period of time.
- Avoid revolving your credit as it usually carries high interest rates.
- Check your credit report regularly to ensure all information is up to date
- Avoid having too much unsecured debt; Secured loans, like a car loan or home loan are always preferable to unsecured loans.
You may be wondering how to build up your credit score if you don’t have any debt. Unfortunately, if you don’t have any debt, you won’t have a credit score, this is as your credit score is calculated on your credit habits. This does not mean your financial health is bad, there is just simply not enough data for your score to be calculated. This can however be bad news if you are looking to apply for a home loan. If you find yourself in this situation, your first step would be to apply for financial products that can assist in building your credit record. This can include:
- A credit card;
- Phone contract;
- Vehicle finance;
- Clothing accounts.
Further, should you find yourself in a situation where your credit application has been refused, it is important to know that you have a right (as per the National Credit Act) to be informed, in writing, why the application has been refused. If your credit score was the main problem, the bank or credit provider has to disclose the name, address and contact details of the credit bureau that issued the credit report. This will allow you to get hold of your credit report to see exactly what is keeping you from a potentially successful application. It is however important to note that your credit score and report are not the only factors banks and other lenders look at when doing the assessment. This criterion may differ from one financial institution to another.
Building and maintaining good credit does not mean not borrowing money, it simply means living within your means. To make yourself an attractive future lender, be realistic about what you can afford and, vitally, be disciplined about how you manage your debt.