Having debt can be an expensive exercise. We will explore how you can get debt for cheaper by having a good credit score. Your credit score determines how much you will pay for your loans. This is why your credit score and credit report is very important.
What Is A Credit Score?
Your credit score is a numerical number that the credit bureaus give you based on a magnitude of different factors. Credit providers use this score to determine a few things including their willingness to give you debt and if so, how much it will cost you. Your credit score can also determine what your credit limits will be.
How Is My Credit Calculated?
There are different factors that are used to calculate a credit score but generally, these are the main one’s used:
- Payment History
- Debt Utilization
- Credit Access History
- Total Number Of Accounts
- Total Debt Outstanding
- Number Of Inquiries
Credit bureaus use these factors to work out a score. Different bureaus have different score scales, so you have to look at that credit bureau specifically and cannot compare scores between bureaus. Some scores might be out of 750 and others out of 1000.
How Does My Credit Score Affect Me?
Interest Rates: This is a very important reason for you to care about your credit score. If you have a high credit score, the banks will be more willing to lend you money. A higher credit score will also earn you better interest rates. The reason for this is that the banks determine your interest rate based on your risk level. The riskier you are (i.e. the lower your credit score), the more they are going to charge you.
Job Application: Most business nowadays do a quick credit check on potential job candidates. Especially if you are looking for a job in the business/finance/accounting streams, your credit score may impact your chances of getting a job. It is risky to allow a financial advisor to give clients advice when their own finances aren’t in order.
Options: Having a higher credit score gives you more options. You can choose to take out more debt if you need to and you’ll be able to apply for housing or vehicle finance if you can afford it. You are more likely to be offered a business loan or business overdraft if your credit report is in good standing.
Rentals: Many landlords and rental agencies do personal credit checks these days to assess the likelihood of you paying your rent on time. If you have a low credit score, they may choose another applicant because of this.
Insurance: Some insurers come up with an insurance score used to calculate risk. Risk levels affect the premiums that the insurer will charge you. The insurance score may be calculated using some elements off of your credit report.
How Do I Build A Good Credit Score?
If you have never had any credit before, you have to get into the market in order to build a credit score. This may seem counterintuitive but if you think about it from the lenders point of view it makes sense. Lenders want to see that you have some sort of decent payment history. The quickest and easiest way to start is to open a simple store account. Go to Woolworths, Edgars or Foschini or another retailer that offers credit and open a new account. Buy something that you can afford and pay it off over a few months. This is one of the ways to build a payments history and a credit score.
What If My Credit Score Is Already Low?
If you already have a bad credit score there are a few things you need to do. You need to catch up on any arrears or short payments until all of your accounts are ‘up to date’. Once you are up to date, make sure you keep on making all of your debt repayments in full each month. If you are unable to do this because you have too much debt you should speak to a debt counsellor. You may be able to qualify for a consolidation loan if you are able to make your payment but you feel that you have too many accounts.
If you have any defaults or judgments, query these with a credit bureau to find out which accounts they are. Make sure that you settle these older debts and pay according to your court order.
Do not make too many loan enquiries with the banks and other lenders. Making many enquiries over a short period of time will make you seem desperate. This will affect your credit score negatively and reduce your chances of getting credit.
Don’t take out debt unnecessarily. By having lots of debt, you increase your debt utilization. Lenders see you as over-exposed and over-committed if you have lots of debt to your name and you make use of a large proportion of what’s available to you.
What Else Can I Do?
Remember to budget and make sure you can afford all of your debts and living expenses. Also make sure to check your credit report often. You get one free credit check per year with most of the South African credit bureaus.