How is your credit score determined?
Every time you take out credit, you give the credit bureaus an indication of your creditworthiness. If you consistently default on your payments – in other words, your payments are late, or you don’t pay in full – this will be recorded and considered by future creditors.
There are five main credit bureaus in South Africa, these being TransUnion, Compuscan, Experian, Vericred, and Xpert Decision Systems (XDS). These bureaus gather information on individuals’ creditworthiness.
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 is a reflection of your creditworthiness and it will determine whether future creditors trust you.
The following brackets apply to your CreditSav credit score:
- 901 - 1000: Excellent
- 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 willing 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 classified as hard or soft enquiries. The former is when a creditor, such as a bank, requests your credit score. The latter is when you check your own credit score. If you have too many hard enquiries, your credit score will drop.
- Newly opened accounts: If you decide to open ten new credit-bearing accounts in a month, this will 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 (DTI) 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 question whether you will be able to settle all of your instalments at the end of each month, and your credit score will drop.
- 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. If you avoid the items on the above list, and you ensure your accounts are settled on time, your credit score will slowly improve.
While this happens, you should keep track of its progress so that you can adjust your behaviour if necessary. The better your credit score, the better the deals you’ll be eligible for.