Credit score: What is it?

Credit scores are important if you ever want to borrow money from a financial institution, whether it's to purchase a big asset like a house, or to buy those sneakers you've been eyeing for months. Read on to find out what exactly a credit score is, how it works, and get a few tips on how to improve yours.

Credit scores explained


A credit score is a numerical value based on your credit history. It's used by lending institutions to decide whether or not to approve a loan or credit card. A good credit score means you're more likely to repay your debt on time, while a bad credit score indicates you're less likely to do so. So the higher your score, the better.


Who uses credit scores?


In South Africa, credit scoring is used by a number of businesses to determine whom they should and shouldn't lend money to in order to minimise their financial risk. These include banks, micro-lenders, retail outlets that offer store cards, insurance companies, and even landlords renting out their properties.


What affects your credit score?


Any information relating to your payment history for your loans and credit cards affects your credit score. How much credit you've taken out, how quickly you repay your debts, and whether or not your repayments are on time, influence your credit score. The type, number, and age of your credit cards and loans affect your score too, along with your total debt. Official records regarding your credit standing are also factored in, such as if you've filed for bankruptcy, and even the number of enquiries creditors have made to view your credit record can negatively affect your score.


How to build a good credit score


There is a delicate balance when it comes to achieving a good credit score. On the one hand, without a credit history you can't have a credit score, and on the other, you don't want to get into unmanageable debt. The aim is not to eliminate or avoid all debt but to manage it well. To improve your credit score, pay all your bills on time, don't take out more credit than you can comfortably repay, and pay more than the minimum balance on outstanding debts.


Some people who earn a salary and have several monthly expenses such as fuel, food, and clothing accounts, get these charged to their credit card and use their income to pay off their credit card each month.


Credit isn't something to fear. Use it wisely and you'll maintain a great credit score for life. With our practical tips, the next time you're applying for car finance or comparing personal loan quotes, you'll feel more confident that you've taken good care of your credit standing.


Sources: Wikipedia, Forbes


Prices quoted are correct at the time of publishing this article. The information in this article is provided for informational purposes only and should not be construed as financial, legal, or medical advice.