Your credit score is a measure of your ability to pay your bills and manage your debt. Lenders use your credit score to assess how risky it would be to lend you money, so it’s wise to look after it throughout your life.
This article explains the steps you can take to improve your credit score
You may not see the benefits immediately, but taking these actions will help you to build a better credit score over time.
Tip: Don’t know what your credit score is? Find out here.
How is your credit score calculated?
Ayanda Ndimande, who oversees strategic business development for Sanlam Retail Credit, says the breakdown of your credit score in percentage terms is as follows: 35% for your credit history, 30% for credit utilisation, 15% for the length of time you’ve been using credit, 10% for a combination of short-term and long-term debts, and 10% for new credit.
Your historical and current behaviour carries a lot of weight with lenders, as does your credit utilisation, which refers to how much of your available credit you’re using. For example, if you have R50,000 credit available and you are using R30,000 of this, your credit utilisation is 60%.
“Generally, a credit utilisation of 30% or less will improve your credit score,” says financial planner Sylvia Walker.
By examining your financial background and history, how much debt you have, and how you pay your bills, lenders can determine whether you can manage your money responsibly, says Sue Torr, managing director of Crue Invest.
“What is important to keep in mind is that it takes time to build your credit history. It’s advisable to start constructing a good credit profile as soon as you start earning, as this can affect your ability to buy a home or car, or apply for a credit card in the future. It can also determine how much finance you qualify for, the interest rate you will be charged, and the terms of your loan,” Torr says.
Steps you can take to improve your credit score
Torr says you should hold at least one line of credit so that you can build a visible history on your profile.
“You can use your credit line to make a single purchase, and repay the amount in full, thereby improving your credit score,” she recommends.
It’s not wise to hold too many lines of credit, however, as this increases your lending risk. “Ideally, consolidate your debt into a single line of credit and make sure you manage that as responsibly as you can,” Torr says.
She also advises against holding too much debt in relation to your income. You can calculate your debt-to-income (DTI) ratio by adding up your monthly debt payments and dividing them by your gross monthly income. For example, if you earn R25,000 a month and spend R5,000 on debt, your DTI will be 20% – an acceptable level of debt.
“On the other hand," Torr says, "let’s assume that you earn a gross income of R25,000 per month, but you spend R10,000 per month on debt repayments. Your debt-to-income ratio would be 40%, which is high, and lenders would be reluctant to provide finance.”
Ndimande says you should be scrupulous about paying your debt on time, and it’s critical that you don’t skip payments.
“Don’t take on any further debt if you can avoid it, especially if you are having difficulties servicing existing debt,” she cautions.
It also helps to close old accounts that you no longer use. Excessive accounts indicate a higher level of borrowing, even if the accounts are inactive. This has a negative impact on your credit score.
“Don’t max out your credit card or other accounts, which indicates high credit utilisation, and pay off revolving credit balances. Don’t incur further debt, even if the cash is available,” Walker says.
Get to know your credit score
Many people are unaware of their credit score, or how it affects their borrowing opportunities.
“The first step is to know your credit rating and understand how it works,” Walker says. “Get a free credit report through the many organisations that offer them. Seeing your credit history in black and white can be a great eye-opener, and it should empower you to start making changes.”
She says there may also be errors on your credit report – perhaps it has been noted that you didn’t pay a creditor, or that you paid late – and you can dispute this with the credit bureaus.
Some sites have a handy calculator so you can see how much money you have left after paying off debts and expenses.
“Use this cash to pay extra into your debts to reduce them faster and improve your credit score,” Walker recommends.
“If you need to consult a debt counsellor, visit the National Debt Counsellors website at www.ndca.org.za – they’ll be able to put you in touch with a registered professional who can assist you.”
Tip: If you’re over-indebted, why not consider debt consolidation? Find out more here.