How is your credit score determined?
Every time you take out credit, you offer the credit bureaus an example of how you’re able to manage credit. If you consistently default on your payments – in other words, your payments are late, or they aren’t paid in full – this will be recorded and considered by future creditors.
There are four credit bureaus in South Africa (TransUnion, Compuscan, Experian, and Xpert Decision Systems) and their job is to gather information on individuals’ creditworthiness.
For the most part, creditors will submit information about their clients’ behaviour with credit to these bureaus. However, note that not all creditors will go to the trouble of submitting this information. On the other hand, most of them are eager to report you to the bureaus if you default.
Do you have a good credit score?
When analysing your credit report, you’ll notice that you’re graded according to a certain score. This number is a reflection of your creditworthiness and it will determine whether future creditors will be able to trust you.
The following brackets can be seen as an indication of what’s considered a good and a bad credit score:
- 901 - 1000: Excellent credit
- 851 - 900: Good
- 801 - 850: Okay
- 601 - 800: Needs work
- 3 - 600: Not good
- 1 - 2: Not enough information to score
The higher your score, the more comfortable creditors will be to offer you credit and the lower your interest rate will be - and vice versa.
What will impact your credit score?
Several factors will influence your credit score. Besides ensuring you pay your instalments in full and on time, the following factors will also have an impact:
- Several hard enquiries: Every time an institution or person checks your credit score, a note will be made on your credit report. These notes are either classified as hard or soft enquiries. The former is when a creditor, such as a bank, requests your credit score, while the latter is when you check your own credit score. If you have too many hard enquiries, your credit score will go down.
- Newly opened accounts: If you decide to open ten new credit-bearing accounts in the next month, this will also count as a red flag on your credit report. This is because it’s often a signal that you’re desperate for cash, and it may be difficult to suddenly balance a range of new accounts.
- Having too much debt: Your debt-to-income (DTO) ratio should never be over 40%. This means that you should never pay more than 40% of your income towards your debt. If you do, creditors will become concerned whether you’re going to be able to settle all your instalments at the end of each month. Your credit score will, therefore, go down if you have too much debt.
- Creditors have taken legal action: If one of your creditors has taken legal action against you, this will have an extremely negative impact on your credit score. For example, if you have a judgement against your name, your credit score will reflect this.
Building a good credit score takes time and you should start as soon as you can. If you avoid the above negative actions and you ensure your accounts are settled on time, your credit score will slowly improve over time.
While this happens, you should keep track of its progress so that you can adjust your behaviour if necessary. At the end of the day, the better your credit score, the better deals you’ll be eligible for.