South Africans’ appetite for credit shows no sign of abating, according to the latest Consumer Credit Market Report released by the National Credit Regulator. The total value of new credit granted increased from R120.08 billion to R123.64 billion for the quarter ended September 2017, an increase of 2.96% when compared to the previous quarter and an increase of 5.21% year-on-year. The number of applications for credit increased by 483 000 from 9.39 million in June 2017 to 9.87 million in September 2017, representing an increase of 5.15% for the quarter.
The rejection rate for applications was 51.39%. This high rejection rate may be due to an impaired credit record. Learning how to manage and improve your credit score will help many consumers.
Improving your credit score means looking after your Empirica 5 credit score from TransUnion. This score is developed by FICO, the world leader in credit scoring and predictive analytics. When you apply for a loan or credit, lenders use the score to decide how much credit to make available to you, and on which terms.
Understanding how your credit score works is the first step to keeping it healthy.
Your credit score has five categories of information: payment history, amount owed, length of credit history, new credit and credit mix.
Your credit score changes as you change your credit management habits.
Even if you have a low score today, you’re not locked into that score forever. There are no quick fixes, but paying your bills on time and only applying for new credit when you really need it can go a long way to moving you from a negative credit status to a positive one.
Let’s take a closer look at how this works.
1. Make payments on time
Your payment history makes up 40% of your Empirica score. So, the best way to improve your score is to make payments on time. If you pay late, your score will go down — especially if you do this often. If you’ve been making late payments more recently, this will also affect your score.
2. Only take on credit you really need
Having a lot of debt can reduce your score. Your Empirica score considers the total you owe, how many accounts you owe on, and how much of your credit you’re using.
Did you know that if you’ve applied for credit but haven’t used it, this will actually count against you! This is because your affordability calculation is based on the worst case scenario of assuming you have used up the credit line, be it an overdraft, revolving loan or an additional credit card with a low limit.
3. Be careful of applying for many accounts at once
The Empirica score also looks at how many accounts you’ve opened or applied for recently. If you’ve opened several new credit accounts in a short period, you are seen as a greater credit risk, and this reduces your score. The score won’t penalise you for shopping for the best rate. If you are shopping like this, it’s best to do it within a 30-day period.
Know more about your credit score
Your Empirica score:
- Is an objective measure of your credit risk that allows lenders to speed up credit and loan approvals.
- Provides a balanced look at your entire credit history, not just what you’ve done with one lender.
- Is fair: it doesn’t consider your gender, race, religion, nationality or marital status.
- Doesn’t look at your income. People with lower incomes can be better credit risks than people with high incomes.
- Takes into account your recent payment patterns. By making an extra effort to pay on time, you can improve your score over time.
- Only includes information found on your TransUnion credit reports, or information that has been proven to predict future credit performance.
Remember, every lender uses credit scores differently and has different lending criteria. If you don’t like what one lender is offering, shop around.
Derick Cluley is FICO’s head of operations in Africa.