The ultimate guide to understanding your credit score

By Isabelle Coetzee

Part of the transition into adulthood is becoming aware of your credit score, and the impact this has on your ability to purchase goods on demand.

If you have a good track record – or a good credit score – you’ll be more likely to, among other things, get approved for a home loan or be offered lower interest rates on credit spends.

Therefore, your credit score indicates the likelihood of whether you’ll be able to meet your monthly instalments based on your financial history.

Justmoney identified the most pressing questions about credit scores and answered them in this easy-to-understand guide. 

1. What does a good credit score look like?

Credit providers believe that the higher your credit score, the more likely you are to settle your bills on time. And the lower it is, the less likely you are to make your payments on time.

However, each credit provider defines this according to their own standards. One provider may consider you a great candidate, while another may think you’re merely average.

The following brackets can be used as an indication as to how confident credit providers may be about your ability to manage your credit:

  • 650+: Excellent credit
  • 600 – 650: Very good credit
  • 550 – 600: Good credit
  • 490 – 550: Sub-prime
  • 490 and below: Poor credit

Your credit score is based on your payment history, the age of your accounts, the amount you owe, the number of hard enquiries made on your report, and any judgements or defaults.

2. Your annual, free credit report

In South Africa, there are four main credit bureaus, namely TransUnion, Compuscan, Experian, and Xpert Decision Systems (XDS).

Each credit bureau offers one free credit check per year to every person. To get your free credit report, click on the credit bureaus above.  

Note that some of these bureaus have partnered with or created unique organisations to assist you with your free credit check. For example, XDS created Credit4Life to assist consumers.

If you would like to receive regular credit reports from all four of the above bureaus, you can fill in the application form on this page.

3. What to do if your credit score is zero

We all start with a credit score of zero. Once we turn 18, we can start improving our credit score by diligently paying off small accounts.

In South Africa, the most popular way of doing this is by opening a store account at a local retailer, purchasing something small, and paying it off over time.

For example, you could open a store account at Edgars, purchase a pair of sneakers, and pay it off over the next couple of months.

When you open your account, as part of the terms and conditions you sign, you will give Edgars permission to send your credit information to the credit bureaus.

At the same time, you also grant Edgars permission to view your current credit report so that the company can calculate an appropriate limit on your credit and an interest rate for your instalments.

If your application is approved (based on your employment and a regular income), you will be able to go home with those snazzy shoes you’ve been eyeing and pay it off over time.

Edgars will then inform the various credit bureaus whether you paid your account regularly, in full, and on time.

For the most part, this information is sent through to the bureaus at the end of each month. However, this will vary from one organisation to the next.

Make sure you open a store account with an organisation that will send your credit history to the credit bureaus – this is not a requirement for credit providers.

Large organisations are more likely to do this, but it’s important to always check with a manager beforehand to make sure you’re not wasting your time.  

If you diligently pay your account for more than six months, you should start seeing results on your credit report.

READ MORE: The value of opening an Edgars account

4. What will bring your credit score down?

Opening a store account and watching your credit score slowly climb is only half the battle. Once you’ve established yourself in the world of credit, you need to maintain your status.

But before looking at further ways to improve your credit score, you first need to understand what could ruin it.

Frequent hard enquiries on your credit report

When a person or organisation enquires about your borrowing history from one of the credit bureaus, you may see an impact on your credit score.

There are two types of enquiries: a soft enquiry and a hard enquiry.

A soft enquiry is when your credit report is checked as part of a background check. For example, when you apply for a job your future employer may run a credit check on you.

Other examples include checking your own credit report, or having it checked by an insurance company. Your permission is not required to perform a soft enquiry.

A hard enquiry, on the other hand, involves a credit check from a financial institution, such as a bank, where you’ve applied for a home loan or a personal loan.

Unlike soft enquiries, hard enquiries can have a negative impact on your credit score.These are noted and kept on your credit report for two years, and if they occur too often, they can lower your credit score.

If possible, try to avoid more than two hard enquiries per year.

Missing or late payments to your credit providers

It can be tough to keep track of all the different payments you need to make at the end of each month, and this becomes increasingly important when you need to settle your credit accounts.

If you miss a payment or you do not make a payment on time, this will reflect in your credit report, and have a negative impact on your credit score.

To find out by which dates you need to settle your individual accounts, have a look at each one’s terms and conditions, as well as the information stipulated on your statements.

Your credit accounts are all new

One of the most important characteristics in a lender is long-term stability. Credit providers want to see how consistent a lender is, and whether another institution already trusts them.

This is usually measured by the age of your accounts. For example, if you’ve had a credit account at your local retailer for five years, without incident, it shows you are consistent.

Having more than five years’ worth of credit history is considered good, so the sooner you open your first account, the longer your account will be active for.

On the other hand, having several new accounts open that are less than a year old is considered a red flag because it doesn’t show long-term stability.

Owing unmanageable, large amounts

Having too much debt is usually defined as “living beyond your means”. In other words, you do not make enough money to cover both your costs and your debt.

Your debt-to-income (DTI) ratio can be used as an indication of whether you’re overindebted or not. Have a look at the below formula to work out your own DTI ratio:  

Total Recurring Monthly Debt / Gross Monthly Income = DTI Ratio (expressed as %)

According to Investopedia, consumers should try to keep this ratio around 36%, with 28% or less of it being allocated towards monthly mortgage payments.

If your DTI ratio is too large, your credit score may be impacted. This is because credit bureaus believe responsible consumers won’t take on debt they can’t comfortably settle.

Therefore, having an incredible amount of debt in relation to a small income means that a consumer will struggle to settle their accounts, whilst also covering their daily costs.

Another indication of whether you have too much debt or not is the percentage of your credit limit you choose to utilise. TransUnion recommends using 35% or less of your limit.

For example, if your credit limit is R100, then you should not take out debt exceeding R35. Or if your limit is R2,000, you should not have more than R700 in debt.

Having judgements on your report

If you continuously default on your payments, you may be issued with a court judgement. This is a last-ditch effort by your creditors to have you settle your debt to them.

This is not to be taken lightly because a note of this will remain on your credit record for five years, which may dissuade future creditors from lending to you.

However, if you settle your account immediately after receiving the judgement, it will be removed from your record.

Note that the amount that’s due once you’ve received a judgement is usually larger than the original debt, because it includes legal charges.

Besides judgements, the following things will also be marked on your credit record:

  • Complaints: If you query something on your credit record and it turns out that you were in the wrong, this will be noted in your record and stay there for six months.
  • Debt Restructuring: If you are under debt counselling, this will be noted on your credit record. Once you’re debt-free, it will be removed.
  • Sequestration: This is when your assets are removed to help settle your debt. This will remain on your credit record for five years, or until you have a rehabilitation order – which will also remain on your credit record for five years.

5. What will improve your credit score?

The reverse of each of the above points will ensure that your credit score improves over time. For easy reference, here’s the flip side of the above list:

  • Having infrequent hard enquiries into your credit record
  • Never missing a single payment, and always making payments on time
  • Having a range of credit accounts, some of which that are older than 5 years
  • Owing small, manageable amounts that don’t exceed an unreasonable DTI ratio
  • Not having any judgements, false complaints, debt restructuring, or sequestration

In addition to this, you can further improve your credit score by keeping your credit accounts open and diligently settling your debt over time.  

Even if you have the means to settle your debt immediately, it might be in your best interest to leave it on your account and pay it off slowly over a period of time.

When doing this, make sure you pay slightly more than your monthly instalment and try to pay your accounts on the same dates each month.

By going above the minimum requirements, you’re showing your creditors you’re eager to settle your debt, and that you you’re committed to doing so on time.

For example, if you owe R500 and your monthly instalment is R50, you could make a monthly payment of R70 each month, and make sure it gets done on the 28th of each month.

Note that closing a credit account that you’ve struggled with in the past will not erase your bad credit history. It would be better to keep the account open and prove you can do better.

6. What to do if there’s an error on your credit report?

According to CompareGuru, only 1.6% of South Africans check their credit record. This means that 98.4% of people don’t know whether there are errors on their credit record or not.

As a responsible consumer, it’s incredibly important to view your credit report annually, and to report any discrepancies to the credit bureaus immediately.

Keeping track of millions of South Africans’ credit history is challenging, and mistakes do happen. If you realise that your credit score is low because of inaccurate information, you must inform the credit bureau you received your report from.

  • TransUnion: Call 0861 886 466 or login online to put forward your dispute within 3 months of having received the credit report you’re disputing. Fill in the “Challenge Form” and TransUnion will call you within 48 hours. The investigation will last for 20 working days and you will receive an updated credit report thereafter if there were in fact errors on your report.
  • Experian: (1) Make sure you have a valid dispute by checking the following list, (2) gather all the necessary evidence to back up your claim before contacting Experian, (3) get in touch with its Consumer Relations Division by calling 0861 10 5665 or sending an email to consumer@experian.com, (4) your case will be investigated for 20 working days, and (5) your credit report will be updated if it’s found to be incorrect.
  • Compuscan: Get in touch with its Consumer Care division by calling 0861 51 41 31 or sending an email to consumercare@compuscan.co.za. Alternatively, you can fill in the Compuscan Contact Us form on the following page.
  • Xpert Decision Systems (XDS): You can lodge a complaint through one of two options: (1) After logging in to Credit4Life and viewing your credit report, you can click on the blue and red icon that will take you to its Dispute Form. Remember to attach supporting documentation. You will receive an SMS confirming receipt of your submission, your dispute will be investigated within 20 working days, and if you were right, you will receive a resolution letter and a new credit report. You can also (2) get in touch with the call centre on 0860 937 000. After speaking with a consultant, you will follow the same process as you would if you lodged your complaint online.

Be cautious when you dispute your credit record. If your dispute is found to be invalid, your credit record will be left as is, and your false dispute will be noted on your report.

If you are unsatisfied with the outcome of your dispute, you are also allowed to contact the Credit Ombud or the National Credit Regulator.

7. Your rights when it comes to credit

The National Credit Regulator implemented the National Credit Act in 2005 in order to protect consumers from being taken advantage of.

South African adults have the right to apply for credit, but the credit provider has the right to reject the application if it believes there is a risk.

However, credit providers may not unfairly discriminate against consumers when calculating their credit agreement, such as their credit bracket, monthly instalments, or interest rates.

But it is not considered discrimination when a credit provider refuses to offer credit to minors, or minors who have not been emancipated.

If you believe you’ve been discriminated against, get in touch with the National Credit Regulator, who will refer your complaint to the Equality Court.

Upon request, a credit provider must explain in writing why a consumer was refused credit, offered a lower credit bracket, or refused a credit card renewal.

If a credit provider accepts an application, the provider must ensure that the information on its credit plan is in plain and understandable language.

Consumers have the right to receive documentation and credit providers are not allowed to charge a fee for any original documents.

For full information on the National Credit Act, click here.

8. What if you can’t make your payments?

Every time you apply for credit, you are also required to take out credit life cover. This is stipulated in the terms and conditions of the contract you hold with your credit provider.

However, many South Africans are unaware that they are paying for this cover, and, as a result, they end up missing out on the benefits thereof. 

Credit life cover takes over your monthly instalments during the onset of a disability or a dread disease, if you are retrenched, or if you pass away.

This protects both you and your creditors from unforeseeable circumstances.

Your payments will be met when you’re unable to make them yourself, and your creditors will receive the correct instalments, regardless of whether you’re able to make them or not.

In 2017, the National Credit Regulator capped credit life cover at R4.50 per month for debt amounting to R1,000. For example, if you have R2,000 debt, you cannot be charged more than R9 for credit life cover per month.

Credit providers usually partner with an insurance company that offers credit life cover and the fees of this company are included in the terms and conditions of the providers’ credit contracts.

Note that you are legally allowed to request credit life cover from a different insurance provider, on condition your chosen insurance company covers the same scope of instances as its in-house insurance company.

If you have an open credit account from before August 2017, it’s a good idea to find out how much you’re being charged for credit life cover per month – some cost up to R50 per month!

For accounts opened before this date, it’s still legal to charge above R4.50 for every R1,000 owed. But you now have the right to change insurance providers in order to lower your fees.

If you are unable to pay your account for reasons that are not mentioned above, the best thing you can do is to contact your credit provider and let the provider know you’re struggling.

It’s not guaranteed, but the credit provider may be able to adjust your instalments. Alternatively, if you realise you will not be able to make your payments in the near future, you may be more indebted than you realise.

In this case, applying for debt counselling or debt consolidation could prevent your credit score from being severely damaged. The sooner you deal with your debt, the sooner you can start rebuilding your credit score.

Do you have any other questions about your credit score?

Register with Justmoney for free and access our Forum to ask any additional questions about your credit score. We will ensure that a relevant specialist answers your questions within 24 hours, and you’ll have further access to information that will empower you financially.

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