Is your credit score credible?
Some advice and tips on why your credit score is so important and what to do about it.
There has been a lot of talk about credit scores, but what is a credit score?
Simply put, a credit score is a three-digit number that reflects the likelihood of you paying back credit.
The three digits are amongst the most important pieces of financial information about you, yet the majority of South Africans don’t know their credit score, nor do they understand how to manage or improve it.
Banks, finance companies, retailers and even landlords use your credit score to determine how financially dependable you are.
A poor credit score could result in your not getting a loan, paying higher interest rates or not being considered for the house or apartment you had your heart set on.
Also read: Top five savings tips for more financial stability
Despite being entitled, by law, to a free credit report annually from one of the credit bureaus, most South Africans seem unaware of how important this score is.
This contrasts with America where an Experian Consumer Services study found that 61 per cent of couples who married after the 2008 recession considered it so important that they discussed their credit scores before getting married.
There are other good reasons for finding out and improving your credit score.
Not least of these is that it could be wrong and people and companies are making decisions about your financial reliability based on incorrect information.
Checking your credit score can also reveal if anyone has been fraudulently using your profile to open accounts or borrow money.
Most importantly, knowing how credit bureaus determine your credit score means you can do something about improving a poor score or maintaining a good one.
Marlies Kappers, head of marketing at DirectAxis, explained that your credit score is calculated according to the information found in your credit report.
“This can include your payment history, the amounts you owe, activity on an account, how long you have held your accounts – the longer the better – judgements, defaults and enquiries about your creditworthiness,” Kappers said.
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Here are some helpful tips for managing and improving your credit score:
• Check your credit report:
Credit bureaus do make mistakes.
Make sure that all the transactional information in your credit report is yours and is accurate.
Look for late payments that may be listed incorrectly and check that the amount owed on each credit account is correct. Alert the credit bureau immediately if you find any discrepancies.
• Pay on time:
Your payment record has a big influence on your credit score and even paying a few days late can negatively influence your rating.
If you have to pay regular instalments, consider setting up a debit order, so you don’t forget and accidentally miss a payment.
Alternatively, put a reminder in your diary or calendar.
• Reduce what you owe:
Use the credit report to list all your debts.
Arrange these according to the interest rates charged on each.
Try to pay off the ones with the highest interest rates first, while maintaining the minimum payments on your other accounts.
• Pay off debt rather than move it around:
Limit revolving debt such as credit cards.
Don’t apply for additional credit or accounts and do not increase your available credit as this could lower your credit score.
• Tell creditors if you have a problem:
Keeping your creditors informed if you’re having difficulties won’t improve your credit score, but if you can negotiate a payment schedule, your score should improve over time.
• Outstanding debt will stay on your record:
If an account is overdue it will negatively affect your score.
Making some payments or paying it off completely won’t clear your credit record, but will improve it.
Be aware that information about your payment profile can stay on your record for up to five years and that closing an account doesn’t make the payment history go away. It will still be reflected in your credit score.
What is your credit score?
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