When applying for a personal loan, or any other credit, you will have to give your creditor permission to access your credit report. This will form part of the criteria they look at when making their decision.
But how do you know whether your credit score is good enough to be approved for credit? We found out what a good credit score is, and what you can do to help boost yours over time.
Tip: You can request to see your credit report through our website. Click here to find out more.
Credit scores are weighted differently
According to Neo Nong, property investor and consultant at Nong Wealth Property, credit score systems vary from one credit bureau to another.
“Most credit bureaus’ maximum score is 850, but with Clear Score, for example, the maximum credit score is 705. Therefore, a good credit score is determined by the scoring system of the credit bureau,” says Nong.
He explains that this is because different credit bureaus have different Fico scoring models and they vary in their approach of weighting credit scores.
“TransUnion weights payment history at 40%, whereas Experian weights this at 35%. Furthermore, 65% of the Fico scoring model of Experian is made up by payment history and credit utilisation, whereas 61% of the TransUnion Fico scoring model is payment history and credit age,” says Nong.
What’s a good number?
Since scores are weighted differently, there isn’t a specific number that’s considered “good”. Rather, it will depend on your number’s relation to the maximum credit score.
Nong says that with a maximum credit score of 850, you need to secure 650+ points for it to be considered a good score, whereas with 705 as the maximum score, 603+ points are considered a good score.
To put this into perspective, Nong says that 650 points is considered a good enough credit score for vehicle finance approval in South Africa, based on the maximum scores of the majority of credit bureaus.
“However, factors such as affordability will also be considered when applying for vehicle finance. An exemplary credit score puts a consumer in a favourable position from acceptance, including being charged lower interest rates,” says Nong.
How can you improve your score?
If you’re unhappy with your credit score, you can take action today to help improve it over time. However, this won’t change overnight, and you need to be patient and persistently work on it.
Nong makes the following five suggestions to get you started:
1. Ensure that payments are made on time: Early payments are an advantage. You need to be responsible when it comes to paying back credit by the agreed date. Late payments have a negative impact on your credit score. Voids, or missed payments, and late payments decrease your credit score.
2. Have less than three credit enquiries a year: Enquiries refers to the number of credit facilities you have applied for. The credit bureaus discourage people from applying for a lot of credit in a short space of time. It’s advisable not to make more than three enquiries per year.
3. Have less than ten credit facilities in your name: You should limit the number of credit facilities you have. As much as credit will open investment opportunities, having too many credit facilities will decrease your credit score.
4. Do not use more than 40% of your credit: You should not use the entire credit amount as this makes it seem as though you’re dependent on credit facilities to make ends meet. For example, if R10,000 credit is granted to you, you should try to keep your credit expenses below R4,000.
5. Avoid closing and moving from one credit provider to another unnecessarily: Closing a credit account should be the last resort. If you’re unhappy with the credit facility based on a dispute, closing the credit card, and moving to a new one will negatively affect your credit score.
Building your credit score is all about consistency. If you keep these five tips in mind over the next year, your credit score will start to improve.
Find out whether your credit score is high enough to be approved for a personal loan.