Improving Your Credit Score

Waiting for a Personal Loan to be approved is a bit like going on a first date. Your hands are sweaty and your stomach’s tied in knots, as you wonder whether this is your best option and worry over potential rejection.

When it comes to Personal Loans, credit providers will look at your credit score as a major factor in deciding whether to approve you or not. To help make you a more attractive option to Personal Loan providers, we asked a series of credit service providers and financial advisors for insider tips on improving your credit score. In this article, you’ll learn more about what a credit score is, how to check it, and how to improve it so that it’s good enough to win over any credit provider.

What is a credit score?

Wanita Isaacs, Investor Education Manager Allan Gray, describes a credit score as an assessment that future lenders, employers or landlords use to decide whether you are likely to repay any amount you want to borrow over the specified period.

“A credit score is a three digit figure generated from the information on your credit report – a file detailing your borrowing and repayment history. It tells potential lenders how well you manage your repayments, which, in turn, will determine if you'll qualify for a loan, credit card or store account,” says Michael Bowren, CEO and Director at Fincheck. 

Who uses a credit score and how?

Michael says that financial institutions are the main users of credit information, as it’s a widely understood method of assessing a person in terms of financial risk. “Lenders are more likely to offer a loan to individuals who have a good credit score as this means that the person is more likely to pay it back,” he says. In addition, Michael says that due to the huge amount of credit applications, banks and lenders need a way to calculate the risk around lending money to an individual, and this is what a credit score is used for.

Consumers can get a free credit report from credit bureaus such as TransUnion and My Credit Check to help them to make informed decisions to repair their credit score. In addition, companies can also view another person’s credit score as long as that individual gives their permission.

Why is a credit screening sometimes needed by prospective employers and landlords?

Michael says that a credit score takes several things into account, such as the number of late payments you’ve made, the number of accounts you have, and the amount of debt you are in. “Landlords would want to know this information so they can determine the probability of you paying your rent on time,” he says.

Because debt is a major concern in South Africa, Michael says that if you’re applying for a position in the finance department of a company, your employer might be interested in your credit report because it will give an indication as to how well you manage money.

What information is used to determine a credit score?

Michael sums up the main factors that make up a credit score as follows:

• Payment history: Have you repaid your debts on time?
• Amounts owed: How much debt are you in?
• Length of credit history: Sometimes, having no credit history can be a negative.
• Types of credit: Do you have credit in numerous categories? From credit cards and store credit to Personal Loans and a mortgage?

What is the credit score range and what constitutes a good credit rating in South Africa?

A credit score varies between 330 and 850. The higher you rank, the more likely you'll be awarded a loan from a credit provider.  According to Credit Health, the following range is used a general rule when calculating an individual's credit score:

750 +: Excellent Credit. Lenders will approve your loan application almost immediately and offer you low interest rates.

720 – 749: Very good Credit. Credit providers see this as an equally profitable rating and will offer you huge loans with excellent repayment terms.

680 – 719: Good credit. Lenders will most likely consider you for prime financing and still offer you good settlement options.

620 – 679: Sub-prime. At this score, lenders will either reject you application or offers you high rates.

619 and below: Poor credit: Lenders will most likely refuse your credit application.

However, Michael says it’s difficult to give a value on what a good credit rating is, as it changes with time and different institutions have different criteria to run credit. In most cases, the credit report will explain the figure you see as your credit score, he says.

What damages a consumer’s credit score?

Christo Gaybba from Smart Personal Loans says that the main factors leading to negative credit scores are primarily late payments, skipped payments and not fulfilling payment agreements.

In addition, Sally Tindall, money editor from Rate City, says that your credit score takes into account any late repayments or defaults (unable or refusing to make any payments), which puts a black mark on your record. “Be aware that multiple credit applications in a short period of time and high credit card limits can also work against your credit score, so bear this in mind when applying for that second credit card or Personal Loan,” she says.

What steps can consumers take to repair a bad credit score?

Christo says that the first step to a healthier credit score is to admit there is a problem. “Consumers should always stay positive to avoid unnecessary stress, low self-esteem and confidence, and should rather stay focused on the road to a healthy credit score,” he says. This includes things like cutting out unnecessary expenses including takeaways and eating out, and reducing your use of cellphone data.

According to Sally, one of the best ways to improve your credit score is actually to have some level of debt. “This may seem absurdly counterproductive, but having a small amount of debt on a low interest credit card that you pay off consistently each month within the interest free period will actually prove to lenders that you can competently manage debt and go a long way to helping your score,” she says.

Sally also says that you should check your credit report for any errors listed on it by lending institutions. “This is more common than you might think, so do a thorough read of your report to make sure you’re not paying for someone else’s  mistake,” she says.

Christo also advises that you enlist the help of credit providers if you’re unable to fulfill payment agreements. “Contact them to arrange alternative payment arrangements, for example, paying the minimum installment amount, payment holidays and lowering installments on your Personal Loan by increasing repayment periods,” he says.

How can you prevent bad credit in the future?

Christo gives several pieces of advice for avoiding bad credit:

• Create a monthly budget and stick to it.
• Always pay bills on time and never skip payments.
• Lower the maximum balance at credit providers and close unnecessary accounts. Personal Loans can get a consumer out of a tight financial spot, but always make sure the monthly repayment is affordable.
• Set financial goals and celebrate them when they are achieved, as this will help you to stay positive about managing your debt.

Conclusion

It’s important to remember that your credit score is in your hands, and keeping track of it is an essential part of financial health. The National Credit Act in South Africa gives you the power to access and challenge misinformation held by a credit bureau that could prevent you from getting credit. More than ever before, consumers are better able to access credit in a safe, responsible and transparent market. Be it for a car, a home or a small venture, when you take out a loan and pay it off responsibly, this is an opportunity to get on the path to financial prosperity and greater independence. To find the right loan for you, compare Personal Loans to make sure you’re getting decent interest rates, a fair deal and value for your money from an accredited provider.