By Mxolisi Mhlongo
You have just got that promotion or a new job and you want to buy a car but does your credit score allow?
Some will splash out and buy their pride and joy using cash but most people will have to consider applying for finance. This then brings up the matter of a credit report or fondly know as “ITC”.
What is a Credit Report?
A credit report is a document that shows your credit management, account management and your general financial status at any given time. It’s the document which financiers go to in their analysis of whether to give you finance or not. In that credit report, there is what you call a credit score, which is a rating of your credit responsibility. Your credit score takes into account your past credit behavior and, unfortunately, it cannot be changed overnight – you need to work on it over time, months or even years.
Financial lenders also use the credit score on the report to ascertain how the financial transaction with you will look when it comes to things like interest rate and so on. The better your credit score, the more likely you are to not just get an approval but also better payment rates thus aiding your financial management. The worse your credit score, the most likelier you are to get a decline or financing terms that are not the best, further putting you in a bad situation. These are things that we rarely look at as we are focusing getting approval.
Generally, the higher the score on your credit report, the better your financial management is considered:
- EXCELLENT: 767 – 999
- GOOD: 681 – 766
- FAVOURABLE: 614 – 680
- AVERAGE: 583 – 613
- BELOW AVERAGE: 527 – 582
- UNFAVOURABLE: 487 – 526
- POOR: 0 – 486
It’s important for each individual to continually monitor his or her credit score through accessing a credit report more often. By law, each person must get a free credit report once a year. By accessing your credit report, you can also see if there is misinformation on it that damages your credit score. Individuals in South Africa can challenge what he or she considers to be false or incorrect information on their credit report. But you won’t know this information unless you monitor your credit report.
In this article, we will look at how you can improve your credit score so you can have better financial terms on your next vehicle finance, home loan or credit card application. Here are the general tips on how to increase your credit score:
- Pay on time: your ability to pay your accounts before due date shows you manage your finances well and banks are therefore more likely to offer you credit. Payment of accounts on time gives more points to your credit score. Accounts like DSTV, clothing accounts are generally taken for granted by consumers, rest assured; they make a big difference on your credit score.
- Credit History: It’s all good buying things cash, avoiding interest and installments but when the time comes for you to make a credit purchase, you then realise you do not have a credit history. It’s called a credit score not a transaction score. Have credit accounts open and keep them open i.e. maintain them even if you don’t use them.
Having a credit card which you manage well counts in your favour compared to not having a credit card at all. Having the credit history of the one credit card you manage well shows you have financial resistance towards mismanagement i.e. Good debt. I once advised a lady who wanted to pay R100 000 cash for a car, to rather apply for finance and put R95 000 as deposit and then pay it off within 2 months. This transaction will not only be shown on her credit history but it will impact her credit score positively.
- Credit Balances: Just above we encourage you to have a credit history but then again, you need to manage your credit accounts. Having multiple credit cards that you don’t use is unnecessary. Rather have one credit card that you manage effectively. The idea of spreading debt amongst credit cards can come back to bite you when applying for vehicle finance or a home loan.
- Check your Credit Report frequently: It’s difficult to challenge credit information inaccuracy when you are waiting for that approval and you are anxious to get your new car or house. The process of challenging a credit report and having the information corrected does not happen overnight. The sooner (preferably way before a credit application) you realise there ’s misinformation on your credit report, the better you will be when you eventually make that credit application. Things like overdue accounts when you actually have paid on time (transactional error maybe) or paid-up accounts showing as still outstanding or in litigation, do negatively affect your credit score.
- Credit applications: Having a credit application has a negative impact on your score. And this impact usually lasts for up to a year so it’s best to avoid making multiple credit applications over a long period. However, making credit applications to different banks for the same transaction (interest rate or better deal shopping) does not count as negative, it actually shows you know how to research for the best financial deal.
- Correct installments: It’s utterly useless paying your bills on time but not paying the correct installment. This can either nullify your credit transaction or it will make a huge negative impact on your score. Pay the agreed amount every-time. Don’t fluctuate your installment amounts where one month you pay less and the next you double the installment only to miss out on the next one and pay less hoping the double installment will cover the default, no you must pay the right installment every-time.