What is a Credit Score?
A Credit Score is a numerical expression used to represent the creditworthiness of an individual. Credit providers and other financial institutions use Credit Scores to determine who qualifies for credit. Other organisations also make use of this information and include cellphone and insurance companies, estate agents and landlords, employment agencies and employers.
The importance of understanding your Credit Score
Your Credit Score is a number from 0 to 999 and is calculated by using all the details in your credit profile. Your latest score is calculated, or rather recalculated, each time you apply for credit or submit an application to obtain your credit report.
You can usually find your Credit Score on your Credit Report. The higher your score, the better your credit health. Having a higher score makes it easier to borrow money or buy goods on credit at lower rates of interest.
Simply put, a Credit Score is a summary of all your financial behaviour and is used to make accurate decisions on whether to lend money to you or not.
Each Credit Provider has a different way of calculating your Credit Score and they may take into account different forms of information. This can include information their organisation already holds on you, or your employment circumstances. Your Credit Score can thus change slightly depending on who you borrow money from.
It is important to note that Credit Scores are also used by other organisations such as Estate Agents and Employment Agents when determining whether to rent you a home or offer you a position in a company. This is why staying on top of your Credit Score, by accessing your Credit Report regularly, is essential in managing your day to day life.
How is a Credit Score calculated?
Credit Bureaus have a scoring system that keeps track of your financial history here in South Africa. They take this history and turn it into a document called your Credit Report. The information on your Credit Report translates to a single score that basically rates your ability to repay debt. A Credit Score usually ranges between 0 and 999. Higher scores are considered stronger and better.
A Breakdown of how your Credit Score is Calculated can help you understand the importance of managing Credit correctly
Your total Credit Score is made up of different categories. Each category counts toward a specific percentage of your Credit Score. The breakdown below will give you a great idea of where to focus on improving your Credit Score.
*Please note, the amounts that follow are estimates because each Credit Bureau has its own way of calculating your Credit Score.
PAYMENT HISTORY - 35%
Payment history is probably the most important category. It determines about 35% of your Credit Score. Paying on time gives you a better score.
DEBT UTILISATION -30%
This category determines about 30% of your Credit Score. It measures how much debt you use.
Let’s say you have a credit card with a R10,000.00 available credit limit. Your Credit Score will improve if you access only 30% or R3,000.00 of this limit at a time. Make sure you don’t use more than 30% of the total credit available to you at all times. This includes clothing accounts and revolving credit plans.
CREDIT HISTORY LENGTH - 15%
The age of your Credit Report also counts towards your score. It determines about 15% of your total Credit Score. Older Credit Reports score more points here. Credit Providers want to see your creditworthiness over a longer period of time. They trust older Credit Reports more.
RECENT ACTIVITY - 10%
Credit Providers want to see if you have been applying for credit lately. This category counts about 10% of the total of your Credit Score. Consumers are regarded as risky when they apply for credit regularly. Your Credit Score will improve if you only apply for credit when needed and not on a regular basis or irresponsibly.
CREDIT MIX - 10%
All the different kinds of debt you own are called your credit mix. This category counts about 10% towards your Credit Score. Credit Providers like to know if you can manage different types of credit at the same time. You’ll score more points here if you own more types of credit like Credit cards, Personal loans. Car loans, Home loans and subscriptions (cell phone, gym, health insurance, etc)
How to Improve Your Credit Score?
It’s good to know your Credit Score. But what can you do to improve it? Here are a few things you can do that will improve your Credit Score. It may take up to 6 months before a Credit Bureau updates your information and you see a noticeable difference in your Credit Score - but it will all be worthwhile in the end.
Improving Your Credit Score can make a huge different to your Financial well-being
PAY YOUR INSTALLMENT ON TIME:
Pay your installment on time each month until your debt is settled completely. By doing this you will also benefit from paying less on interest charges. Don’t allow debt to get completely out of control to a point where you are unable to make payments at all.
AVOID REGULAR APPLICATIONS FOR MORE CREDIT:
A regular need for credit indicates someone is spending more than what they earn. This leads to defaulting on payments and over-indebtedness. Please note that credit includes Credit cards, Personal loans and Revolving Credit Plans. Only apply for credit when it is absolutely necessary.
DON'T USE ALL YOUR AVAILABLE CREDIT:
Use less than 30% of your available credit limit. It shows you know how to manage the credit you have. i.e. If you have a credit limit of R10,000.00 then only use up to R3,000.00 at a time.
DON'T CLOSE OLD CREDIT ACCOUNTS:
Don’t close accounts once you’ve repaid them. An important part of improving your Credit Score is your credit history. Leaving the account open, but unused, adds to your credit history and also adds to your credit worthiness.
CORRECT ERRORS FOUND ON YOUR CREDIT REPORT:
Credit Bureaus have made mistakes in the past. Credit Providers can also make mistakes when they report to Credit Bureaus. Go through your Credit Report regularly and ask to change or remove any errors. For example, you may have settled an account, but it still hasn’t been updated on your Credit Report. Inform the necessary institutions to get it fixed or dispute this with the Credit Bureaus who will act on your behalf to have the error rectified.
Credit Report and Credit Score
Your Credit Score, while the single most important part of your Credit Report, is only one part of your Credit Report.
Your Credit Report however gives a summarised overview of your personal and financial profile, as well your credit rating. It is used by any organisation, that has been given permission to access it, to make accurate decisions on whether to do business with you or not.
The difference between a Credit Score and Credit Report
Your Credit Score is only one part of your Credit Report. Although your Credit Score is almost the single most important part of your Credit Report, the full report gives you some handy information. So, what exactly makes it so useful?
Your Credit Report is pretty much a combined summary of your financial background. It gives an overview of your Credit Score, profile, and rating. It is often used by Credit Providers and financial organisations to make accurate decisions on whether they should lend money to you. Other providers making use of this information may include employment, rental and insurance companies.
Your credit score and credit report can include::
Your physical and postal address.
Lines of credit held in your name or joint applications as is the case with Home Loans.
Your payment history, including missed payments and payments in arrears
Outstanding balances on your accounts.
Credit searches done by organisations that you have applied for credit with
Credit searches by organisations interested in your financial profile. i.e. Employers, Landlords, Insurance Companies.
Publicly available information which may affect your creditworthiness. For example court bankruptcies, judgements)
Where does Credit Report Information Come From?
The information listed on your Credit Report will be influenced by all the accounts you have open with various financial institutions. These institutions have been granted permission to access your Credit Report and also permission to pass on personal information.
Credit Report Information comes from the various Institutions granted permission to access your Credit Report
The information listed on your Credit Report comes from you indirectly. When you apply for credit, rent from an estate agent, or apply for a job with an employment agency you give these organisations permission to access your Credit Report.
On the same form where this permission is granted, you also list all of your current personal information. This information in turn is passed on by the organisation accessing your Credit Report to the Credit Bureaus.
Your credit history will be determined by the amount of money you have borrowed in your life and how much of it you have or have not paid back on time. This information is filtered to the Credit Bureaus every 30 days by each Credit Provider you currently owe money to. When the account is settled the Credit Provider provides this information to the Credit Bureau and the account forms part of your paid up Credit History
The personal information on your Credit Report will generally come from the contractual information you list on your application form when you apply for credit, rental or employment. This information is passed on from the Credit Provider or Financial Institution to the Credit Bureau.
Your employment information also forms part of a credit, rental, employment application. This information is passed on by the Credit Provider or Financial Institution to the Credit Bureau.
DEFAULT HISTORY AND LATE PAYMENTS
When you miss an installment, or stop paying existing debt, the Credit Provider supplies this information to the Credit Bureau. Your payment history can be seen next to the account concerned and is usually marked by zeros for each month paid on time. When there is a late payment the zero is replaced by numbers 1-9. 1 being one month and 9 being more than 9 months. Late payment history remains on your Credit Report for 24 months.
When a legal department or collection agency obtains a court ordered judgement against you for outstanding debt, this is filtered to the Credit Bureaus by the Credit Provider or Collections Agency and not necessarily by the courts. This information will remain on your Credit Report until the debt is settled or until it falls off of your Credit Report after 5 years. The Credit Provider can relist the judgement if it falls off your report for up to 30 years. After 30 years the judgement is rescinded (removed) by default.