Having a healthy credit score is vital, particularly when applying for vehicle finance or a home loan. And improving your score is probably not as difficult as you think.
Credit-scoring methods differ between credit providers, but all of them will check your payment behaviour, specific negative information on your report and your credit application history.
Whether you have a credit card, a store account, a cellphone contract or all of the above, a record of your monthly payment history on each of these accounts is stored on your credit report for 24 months. “If you skipped a payment 13 months ago on your credit card, it is recorded on your profile,” explains Salem Dyafta, brand manager for consumer at credit bureau, Transunion.
“To boost your credit score it is very important to make sure you pay your account in full and on time every month. Even if your payment is only one day late, it will reflect on the bureau as a late payment,” she highlights.
A credit provider will be able to see if you skipped a payment one month and paid double the following month or if you short paid and effectively left your account in arrears for a month.
“Credit providers want to know how well you honour your contracts and any late or missed payments reflect poorly on your score,” Dyafta says.
“The rule is, the higher the score, the better your credit rating,” she notes. Different credit bureaux score differently; so first establish what the minimum and maximum scores are to assess your performance.
Default listings and judgements negatively impact your score. When you’ve failed to pay an account for three months, a credit provider will consider loading a notice of default with the credit bureaux. Before it does so, it must send you a letter notifying you of its intention and giving you the opportunity to settle your outstanding debt.
A judgement occurs when a credit provider takes you to court over unpaid debt.
Following the introduction of credit information amnesty in April 2014, default listings now reflect for a maximum of one year and can be removed even sooner than that if you send through proof of payment to the credit bureaux. Similarly, judgements are removed once proof of payment is sent to credit bureaux and you no longer have to go to court to have them rescinded.
Credit providers also take your credit application history – how often and where you have applied for credit in the past – into account, says Dyafta. If you’ve recently applied for personal loans at a number of different lenders, this will negatively impact your score. On the other hand, if you’ve approached a bond originator or multiple banks to get the best rate on your home loan, this is unlikely to have a negative impact on your credit score.
Use credit cards prudently
While it’s true that you need to have some accounts in order to build up a credit record – on which basis lenders can decide whether or not to grant you a loan – senior data analyst at Compuscan, Jacobus Eksteen cautions that you can be penalised for having too many accounts or the ‘wrong’ kinds of accounts when applying for a secured loan.
For instance, Eksteen explains, a secured loan, such as vehicle finance, as well as an insurance policy, a cellphone account or a satellite TV account enable you to build up a credit history and may be regarded more favourably by credit providers than several personal loans from microlenders.
Just as having too many accounts can count against you, having only one that you over-utilise is also unhelpful. When it comes to credit cards in particular, prudent utilisation is vital. Frequently reaching or coming within 90% of your credit limit is unlikely to count in your favour.
This means that using your credit card for everyday purchases in order to earn points on rewards programmes – even if you are paying it off immediately each month – can negatively impact your credit score. If you’re a disciplined spender you could increase your credit limit so that you’re using a smaller percentage of it, Eksteen suggests.
“The most important criteria by far is how you manage and pay the accounts you do have,” he says.
Under the National Credit Act (NCA), you are entitled to one free credit report per year and have the right to challenge information on your credit report if you believe it to be incorrect. To access a free report, visit www.transunion.co.za; www.compuscan.co.za; www.experian.co.za; or www.xds.co.za.