Having a high credit score can help you to qualify for low interest rates on loans, and can facilitate other financial opportunities. However, is your score the most accurate indication of your financial health?
We investigate what your credit score does and doesn’t reveal about your financial fitness – and why a good credit score should be only one of many tools in your fiscal toolkit.
Tip: Keen to apply for a loan? Start by viewing your credit score today.
Your credit score: Part of a bigger picture
While not the only consideration for loan qualification, a good credit score is a vitally important indicator for credit providers, says Dee Chetty, chief product officer at TransUnion South Africa.
“Let’s say Mphumi wants to buy a new car,” Chetty says. “She has a high credit score and assumes that the finance executive at a car dealership will approve her application.
“However, other factors will be taken into account, such as affordability – which refers to her ability to repay a loan without facing financial hardship – and her overall financial health.”
Chetty emphasises that there’s a difference between your credit score and your greater financial wellbeing.
“Your credit score is a snapshot of your financial trustworthiness, represented as a number. The higher the number, the better your score,” he points out. “Lenders use this number to help them assess the risk of lending money to you.”
Other important indicators of financial health
A credit score is an objective, unbiased lending tool that credit providers use alongside other information about your financial conduct, in order to make a speedy, fair, and informed lending decision.
Your broader financial health is the overall state of your monetary affairs.
“[The latter] includes the amount of money you’ve saved, and how much of your income you’re spending on fixed expenses,” explains Chetty. “It’s a measure of how much disposable income you have available after you’ve dealt with all your non-negotiable expenses.”
Signs of financial health include a steady income, consistent expenses, and a growing cash balance, Chetty elaborates.
“Other signs include knowing your current net worth (the difference between what you own and what you owe), creating and sticking to a budget, and building an emergency fund so you’re not in financial trouble when unexpected events occur.”
What your credit score tells credit providers
Your credit score is based on five main categories of information – your payment history with existing commitments; the amount of credit you have; whether or not you use the full amount of credit available to you (known as credit utilisation); how much debt you’re trying to take on; and your credit mix (how many different types of credit you have).
“Your credit score doesn’t measure your net worth (the difference in value between your assets and your liabilities) – but it does show how low a risk you could be for lenders,” Chetty explains.
Credit bureaus calculate and provide credit scores, but they do not decide whether a lender should grant a loan or not.
“Your credit score is designed to show you, by way of a number, the strengths and weaknesses of the information in your credit report,” Chetty says.
“It shows you how your credit standing compares with those of other consumers,” he adds.
How your credit report is used
Most credit providers use the information in your credit report in their own assessment of your credit risk.
Your credit score, along with your employment history, income and affordability assessments, and the type of credit for which you are applying, may affect the outcome of your credit application.
What does this mean for Mphumi and her dream of owning a new car?
“Before she heads to the dealership to apply for finance with her good credit score in hand, she should take time to review her monthly expenses, and gain a real understanding of how much disposable income she has before buying the car – and how much she’ll have once it’s sitting in her driveway,” Chetty says.
“She may well be able to maintain her high credit score by keeping up with her payments, but she won’t be financially healthy if she has no money to pay for day-to-day living expenses.”
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