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Why it’s essential to know your credit status

Your credit status plays a crucial role in your financial health. We outline the contributing factors, and how to manage these.

14 May 2024 · Fiona Zerbst

Why it’s essential to know your credit status

South Africans are increasingly turning to credit to make ends meet, but banks are unwilling to lend to consumers who are unlikely to meet their financial obligations. According to Experian’s August 2023 Consumer Default Index, more than two-thirds of credit applications were rejected in the first quarter of last year.

Before applying for credit, it’s vital to know your credit status, as it indicates your reputation for managing credit responsibly. We unpack the factors that underpin it, and how to manage them effectively.

Tip: Your credit score is an important factor in your credit status. Be sure to check yours regularly.

The importance of knowing your credit status

Your credit status gives banks and other lenders an indication of your creditworthiness; or the likelihood that you will honour your credit agreements. This is a key factor in securing a loan, and negotiating loan conditions, such as better interest rates.

It’s crucial to know your credit status and keep track of it, if you hope to access financial products. Checking your status regularly will also help you to correct any errors in your credit history.

Your credit report and credit score, and how they differ 

Your credit report and credit score are interlinked indicators of your credit status.

Your credit report is a record of your credit activity and credit history. It includes the names of companies that have granted you credit, along with your credit limits and loan amounts. Your payment history is part of this record, and it shows you how well you manage your accounts.

Most credit and service providers use the information in your credit report to build their own credit risk score. When you apply for credit, they use your credit score (which is part of your credit report), and some additional information, to assess your application.

Your credit score is a number that indicates your trustworthiness as a borrower. Lenders use this figure to help them determine the risk of lending money to you. It’s an objective, unbiased tool that’s used to provide you with a faster, fairer, and more consistent response.

Understanding your credit report: What does it mean?

Your credit report includes the names of companies that have extended you credit and loans, along with details such as credit limits and loan amounts. 

“Your payment history is also part of this record and can show how you positively manage your accounts,” says Dee Chetty, chief product officer at TransUnion South Africa.

“If you have delinquent accounts, are under debt counselling or administration, or have been sequestrated, this information can be found in your credit report.”

The report that credit bureaus provide to consumers is educational, unlike the lender-based scorecard that a lender uses to decide whether to grant you credit.

“A lender will consider a range of factors that can include elements of your credit report, your employment history, income and affordability, and the type of credit you’re applying for,” Chetty notes.

“Think of your credit report as your financial report card – your credit history provides lenders with insight into your financial habits to determine your creditworthiness.”

Address disputed information in your credit report

If any of the information that appears in your credit report is incorrect or unfamiliar, you can raise a dispute with the relevant credit bureau, says Ans Gerber, head of data insights at credit reporting service Experian. The credit bureau will then investigate and resolve the issue.

If you’re not satisfied with the resolution of your query or dispute, you can refer the matter to the
National Credit Regulator, Gerber counsels.

Why do I need to know my credit score? 

A good credit score is a powerful financial tool. It can influence everything from the interest rates you’re offered on loans to your ability to buy your own home, get vehicle finance, or even start a business, says Chetty.

“With a good credit score, you can negotiate better loan terms, which [can help offset] the exorbitant interest rates prevalent in the South African market.”

How do I check my credit score? 

South African consumers can obtain one free credit report a year from any of the four main credit bureaus – Experian, TransUnion, VeriCred, and Xpert Decision Systems (XDS) – and other registered credit bureaus (there are more than 50).

Experian’s web-based app, Up, allows you to check your credit score and download your full credit report any time at no charge, while TransUnion’s TrueCredit service, which costs R40 a month, gives you detailed access to your credit profile, allows you to check your credit score as often as you like, and alerts you to any changes in your credit report.

JustMoney has its own platform that enables registered users to view their credit score for free, based on information supplied by Vericred.

How often should credit scores be checked? 

It’s wise to check your credit score often to stay informed about your credit status and ensure it reflects accurate information. 

“Your credit score is a dynamic number that changes with your financial behaviour,” says Chetty. “By monitoring your credit score, and taking steps to improve it, you’ll enhance your borrowing power.”

Your credit report is regularly updated with new information, and with it, your credit score, so Gerber recommends checking it at least once a month.

Besides allowing you to manage your financial affairs more efficiently, regular checks will alert you to discrepancies, unauthorised transactions, or potential fraud on your accounts.

What affects a credit score? 

Multiple factors may affect your credit score, Gerber says.

These include:

  • Your payment history
  • The length of your credit history
  • The types of credit you have used
  • Excessive use of revolving credit available to you
  • Multiple enquiries for credit within a short period of time
  • New credit taken out
  • Your total debt
  • The number of accounts you hold
  • Late or missed payments
  • Court orders, administration orders, and/or judgements taken out against you
  • Undergoing debt counselling

“Monitoring your credit report regularly can help you keep a close eye on how these factors affect your score, and how you can improve it,” Gerber suggests.

Below, we examine some of these factors in more detail.

The importance of your payment history

Your payment history is generally the most heavily weighted factor – comprising roughly 35% – in your credit score calculation. 

Even one late payment can lower your credit score, so paying your bills on time is vital. A recent late payment will count against you, as will accounts in arrears.

Other factors that may count against you include not having a steady income derived from full-time employment, frequent job changes, and periods of unemployment.

Debt issues such as defaults, judgements, or accounts sent for collection can cause significant, long-lasting damage to your credit score, so talk to your creditors if you’re struggling to make repayments.

On the other hand, good payment behaviour, such as paying early or on time, or more than the minimum amount due, will stand you in good stead.

Lenders want to know you’re consistently responsible, and that you have a solid track record of repaying debt across utilities, loans, credit cards, and more.

Excessive use of available revolving credit 

DebtBusters, a leading debt counselling company, recommends that your credit use be 30% or less of your available credit limit. For example, if your credit card has a monthly limit of R5,000, you shouldn’t spend more than R1,500 before repaying it in full.

This shows lenders you have not overextended yourself, or used so much credit that you may not meet your repayments. Having balances outstanding on numerous accounts suggests you may be overly dependent on credit.

A high credit utilisation ratio – that is, the proportion of available credit you’re using at any given time – can hurt your credit score. This is particularly the case if you “max out” your credit card and use all the credit available to you.

In addition, applying for several new credit accounts in a short period of time will result in a lot of “hard enquiries” appearing on your credit report. These are enquiries from lenders, and they can cause your credit score to drop, as you may seem desperate to access credit.

Length of credit history

Credit scoring models will consider the age of your oldest account, the average age of all of your accounts, and how your credit accounts have been managed. 

A long credit history provides more insight into how you conduct your financial affairs, allowing lenders to better understand your financial habits and behaviours. Having accounts that go back only a year or two makes it harder to assess the lending risk, whereas older accounts, when consistently managed responsibly, will have a positive impact on your score.

Some consumers do not yet have a credit history, which makes them an “unknown” risk. Consequently, they may not qualify for credit.

Some remedies include becoming an authorised user on a family’s credit card, co-signing a loan with someone with a good credit history, or applying for an easily managed small loan.

Types of credit used

Having only one kind of credit, such as a cell phone account, doesn’t indicate how you would manage different types of loans, such as a credit card, a home loan, and a personal loan; and thus provides an incomplete picture of your borrowing behaviour. 

Although it may be risky to have too many accounts, it’s helpful if you can prove you’ve managed a home loan responsibly, or that you can use revolving credit wisely.

New credit taken out

Taking out new credit can be either helpful or harmful to your credit score, depending on the circumstances.

While opening too many accounts in a short period can be problematic, opening a new account can benefit you if it’s a new type of credit for you, and if it will help you build your credit history.

Increasing your overall credit limit can also help to lower your credit utilisation ratio.

Is accessing my credit score free?

Some service providers allow you to check your score for free with some conditions attached, while others charge a fee and bundle this with specific benefits. 

You’re legally entitled to one free credit report from the major credit bureaus annually.

Credit score ranges in South Africa 

Generally, the higher your score, the better – but scoring bands differ from one credit bureau to another. Each credit bureau has its own scoring model and range.

For example, Experian would deem anything between 598 and 633 to be an “average” score, while TransUnion regards anything from 583 to 613 as an average score.

A TransUnion credit score can range from 0 to 999 (poor to excellent), while Experian’s score can range from 0 to 740. “Anything higher than 633 is deemed a good score at Experian,” notes Gerber.

All of the information in your credit report contributes to the calculation of your credit score.

“If you want to apply for credit to buy a home or car, for example, or request a credit limit increase, your credit score can serve as a guide. A poor, unfavourable, or below-average score indicates that you have some work to do,” cautions Chetty.

A poor score could also be an indication that there is a problem with the information contained in your credit report.

“You may need to investigate and possibly challenge some of the information in your credit report before you apply for that all-important loan,” he adds.

How can you improve your credit score?

Regular monitoring is the most effective long-term strategy to maintain or improve your credit score. 

Building (or rebuilding) your credit profile may take time, but with consistent effort and the right actions, you can regain your credit confidence and achieve your financial goals, says Chetty.

Pay what you can to avoid late payments reflecting in your credit report. If you can’t make minimum payments, talk to your lenders to see if they can assist you.

Below are some effective actions you can take to improve and maintain a good credit score.

1. Pay your bills on time

Punctuality is one of the cornerstones of a healthy credit history. Ensure you make timely payments for credit card bills, loan repayments, and any other financial obligations. 

“Your payment history constitutes a significant portion of your credit score, reflecting your reliability,” Chetty points out. “Setting up automatic payments or reminders can foster discipline.”

2. Pay off your credit cards 

Paying your balance as quickly as possible, and paying off your card completely, should be priorities. The lower your credit utilisation, the better your credit score will be. 

Getting out of debt will also help, as credit scoring models are based on your total debt obligation. Reducing your overall debt burden can only benefit you.

3. Don’t take on too much debt 

Although it can pay to have a diverse credit portfolio with a mix of credit cards, retail accounts, and instalment loans to prove you can manage debt responsibly, this can backfire. Just because you qualify for more credit doesn’t mean you should take it on. 

Having too much credit could hurt your credit score, especially if you have only credit cards – and you may not be able to manage all of your accounts judiciously.

A good rule of thumb is to keep a card for an emergency and avoid using more than 30% of your available credit. This shows restraint and responsible financial behaviour.

Also remember to use any benefits that come with the card, such as cashback or discounts.

4. Close inactive accounts

Inactive accounts are considered part of your credit utilisation ratio, even when disused. This can harm your credit score.

Closing unused accounts will reduce your overall credit limit and simplify account management.

5. Make sure you have a credit history 

Applying for a home or vehicle loan without a credit history is likely to severely limit your options.

Maintaining a good credit history gives you access to more favourable interest rates and terms, which is a significant advantage and allows you to save over the life of a loan.

Some employers also check credit reports when hiring for financial positions.

It takes patience and discipline to build up a good credit history, but it’s worth establishing a solid track record that will stand you in good stead if you want or need to borrow.

6. Know your partner’s credit score

Knowing your partner’s credit score allows you to plan significant joint purchases, such as a home or car. 

Your mutual finances will be affected if your partner’s credit score is low, and they can’t get favourable interest rates.

Being open about your credit score promotes financial honesty and trust, and may encourage you to improve your scores together, preventing nasty surprises and allowing you to plan.

7. Contact your creditors if you can’t pay  

It’s essential to be proactive if you’re unable to make a payment. Failing to communicate with your creditors could lead to late fees, penalties, and potentially higher interest rates, not to mention legal consequences for defaulting.

Negotiating with your creditors can help to protect your credit score, as most lenders are open to discussing deferment or restructured repayment plans. It also shows your sense of responsibility and eagerness to defend your financial reputation.

Tips for building a good credit score

Gerber offers the following pointers for building a good credit score:

  • Always answer questions honestly when applying for credit
  • Budget for credit – never buy on credit unless you can afford the monthly instalments. Ask the credit provider to explain the repayment terms and interest rate, and understand how much you must pay back every month, ahead of signing.
  • Try to keep your debt instalments below 20% to 30% of your monthly expenses.
  • Pay your accounts every month by the due date
  • Make alternative arrangements with credit providers if you can’t pay on time
  • Do not ignore letters of demand – reply to them even if you can’t afford to pay
  • Check your credit report regularly to ensure the information is accurate

Tips for financial resilience 

Adopting a holistic approach to your finances will help you to become more resilient and build a robust credit report.

TransUnion offers some useful tips: 

  1. Budget, and plan your finances. Establishing a comprehensive budget based on your income and expenses lays the foundation for financial stability. Use tools and apps that facilitate budgeting, enabling you to track expenditure, identify potential savings, and prioritise essential expenses.
  2. Improve your financial literacy. Tap into financial literacy initiatives, workshops, or online resources. “By enhancing your understanding of financial concepts, products, and regulations, you equip yourself with the acumen to adeptly navigate the intricacies of the financial landscape,” Chetty notes.
  3. Embrace a savings culture. Saving goes beyond accumulation and embodies resilience and foresight, says Chetty. “Whether it’s establishing an emergency fund, exploring investment opportunities, or leveraging tax-free savings accounts, prioritise savings as a strategic tool to buffer against unforeseen expenses and future uncertainties,” he concludes.

Know your financial status

Your wider financial health is the overall state of your monetary affairs. It includes the extent of your savings, and how much of your income is spent on fixed expenses.

It’s a measure of how much disposable income you have available after you’ve dealt with all of your non-negotiable expenses.

Signs of robust overall financial health include a steady income, consistent expenses, and a growing cash balance.

Other indications include knowing your net worth (the difference between what you own and what you owe), creating and sticking to a budget, and building an emergency fund so unexpected events don’t hurt you financially. 

Tip: Is debt preventing you from achieving a good credit score? Find out if you qualify for debt consolidation.

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