What is a credit score?

A credit score is an analysis of an individual’s credit history over the last two to three years. It is a calculation used by lenders to determine whether an applicant qualifies for credit or not, and at what rate, based on their spending history and what this indicates about their ability to repay monies lent to them.

Building a good credit score

In many respects, you should allow your credit record to develop organically. Don’t try to manipulate it by taking on extra credit you don’t need – and avoid taking on excessive amounts of debt just because you qualify for them.

A good credit record is a reward for responsible financial management, and dependable payment of your debit orders month to month.

Good vs bad debt

Good debt is affordable debt that can help you can reach your goals and objectives faster; produce greater value over the long-term, such as education or a home loan; or cover medical bills to improve your quality of life. Bad debt is debt that funds your lifestyle and doesn’t produce any long-term value.

A bad credit rating means lenders may be unwilling to provide credit to you, resulting in the loans you wish to take becoming unattainable. Should you still qualify for the credit, it will be provided at a higher interest rate, making it far more expensive for you to borrow money.
 

The numbers matter

A good credit score in South Africa is between 650 and 669, while an excellent credit score is above 670.

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Improving your credit score

  • To improve your credit score, you’ll need to demonstrate sound financial management over a period of up to three years. This includes:
    Avoid getting into arrears on any of your repayment obligations
  • If you have surplus funds at the end of the month, pay as much as you can into your existing loans, prioritising your short-term debt. This will also save you money by reducing the overall amount of interest you will pay
  • Be vigilant in tracking your finances and disciplined in how you spend them. Avoid buying luxury and expensive items on your credit card and using debt to maintain a lifestyle that your income cannot cover.
     

Building your borrowing potential

Your credit score helps lenders assess your credit worthiness. It shows how well you have paid back money you have borrowed in the past. When you try to borrow money again, lenders use your credit score to see how likely you are to pay them back.

If you have a good credit score, it means you are responsible at paying back what you owe on time. But, if you have a poor credit score, it might mean you’re not trustworthy or dependable – and more likely to default on a loan or credit plan. This may present a measure of risk for potential lenders.

When looking at your credit score to determine your risk as a borrower, they might be hesitant to lend you more money if you have a bad credit score because they're not sure you will pay it back.

The impact of having no score

Locally, any authorised credit providers, including banks, micro-lenders, retailers with credit offerings, and credit unions, have the option to extend financial lending to individuals.
However, they don't base their decision to lend solely on credit scores. They consider various factors, such as your income level, employment stability, existing loan obligations (and of course, your credit score).

For individuals who have not yet established a credit score, lenders face a challenge—they have less information to gauge how trustworthy and creditworthy you might be.

Without a clear picture of your financial reliability, these providers may perceive a higher level of risk and this could lead to them charging higher interest rates for borrowing money. In some cases, they might even decide not to issue credit at all.
If you're concerned about establishing or maintaining a healthy credit score, it's advisable to speak with your bank about strategies to build your credit.

There might be methods to construct a positive credit history without needing to borrow large sums of money, allowing you to demonstrate financial responsibility and improve your credit score.
Whether it's through responsible use of a credit card, making timely payments or utilising smaller forms of credit, there are various ways to ensuring your credit score reflects a positive borrowing history
 

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