Your credit score could be the most important number connected to your name. The three-digit number contains information that shows how well you manage your debt. And creditors like to use this number to weigh you up against other consumers. They use this information to predict whether you’ll be a good or bad consumer. How do you check your credit score and how to keep up a good score?
By looking at your score creditors can tell whether you’ll be a good customer, or not. Your score provides a quick overview of your report. Allowing creditors to make a quick judgment call before seeing the full report.
nowing what your credit score is and how it works, is just as important. It will help you do a proper credit score check.
How do credit scores work?
Your score determines how well you perform on your credit report. Credit bureaus create your report. South Africa’s big four include Experian, TransUnion, Compuscan and XDS. These companies collect as much information about you as possible. And use it to create a comprehensive report.
What is a credit report?
A credit report documents all your accounts, all your repayments, which accounts are in arrears. how many times you’ve applied for credit and more.
In short, your report is an in-depth look at how well you manage your debt.
Credit bureaus are responsible for gathering and compiling all this information. They get their data from various places, but primarily from lenders.
These bureaus collect information about;
- Your identity: This includes your name, address, ID number, date of birth and employment information.
- Your credit: How much credit you currently have. Including credit card accounts, store cards, mortgage, student loans or car loans.
- Your public record: Any court judgments against you, tax issues against your property, or whether you’re blacklisted.
- List of inquiries: A detailed list of any company or person who has requested a copy of your credit report.
The bureaus don’t collect the same information. That means each bureau provides creditors with different information about you.
Creditors could make use of more than one bureau. In some cases, creditors use all four bureaus to provide information about you.
How your score gets calculated?
Credit bureaus use external companies, like FICO, to help their scoring models. Although there are a few other companies who use their own scoring models, we’ll be using the FICO model.
Scoring models may differ, but the general concept remains the same.
*We have no affiliation with FICO in any way.
The FICO model presents a score between 300 – 850, which represents your credit score. Your score is an evaluation that shows your creditworthiness.
Companies like FICO only use your report to generate your credit score. Your score is an overview of your report.
It’s easier for everyone to look at a three-digit number, than analysing a full report. A credit score is convenient when making a quick judgment call on how well you’re doing on your report.
Your score determines how risky you are. Creditors use this to decide everything about your loan application. The higher your score, the better deal you’ll likely get.
FICO generates your score based on various data found in your report. FICO group this data in categories;
The categories above show how each category impacts your credit score. But, the scoring model may change from person to person.
Your score will reflect positively or negatively, depending on how responsible you are. For example, if you make late repayments, your score gets affected negatively. Your score will adjust positively once you start paying on time, every time.
Payment history (35%)
One of the first things any creditor will check is how well you pay other creditors. Creditors want to know if you pay all your debt on time and if you’re paying at least the minimum repayment.
This helps them check whether you’ll be a good or a bad client. This is also the most important category in the FICO scoring model.
Although late repayments get frowned upon, one or two late repayments won’t send you to the dog box. If your score looks good, your one late repayment won’t have a huge knock on the total record. Make sure you make the payment as soon as possible and prevent the build-up of arrears.
A good payment history will not secure the perfect record either. If you do well in the other categories, your score could still be good.
The account types that make up your repayment history include:
- Credit card
- Store cards
- Instalment loans
- Finance company accounts
- Mortgage loans
How your repayment history affects your score?
- Making payments on time
- The amount that you owed
- The amount of missed payments
- How long it took to make a late repayment
Amounts owed (30%)
Just because you owe money doesn’t mean you’re a high-risk or that you’ll have a low scoring number. But, scoring models consider how much is too much for any individual profile.
So, how do they calculate this?
- The amount owed on all accounts
Even if you pay off your credit cards in full each month, your credit report will document the full balance. Your report will only show the total balance of your latest statement.
- The amount owed on different types of accounts
Apart from the total amount you owe, your score records all your accounts. It may hurt your score if the report picks up that you owe too much.
- Revolving accounts
How much of your available debt you’re using has a significant impact on your total score. Using a high percentage will generally hurt your score.
While using a low amount will have a positive impact on your score. But, not using your available credit at all may be worse than using a small amount at a time.
- Having a lot of accounts
Having a large number of accounts may show that you’re a high-risk client. Too many accounts could mean that you’re relying on too much debt. Make sure that you only open accounts when you can afford them and need them.
Length of credit history (15%)
The rule of thumb when it comes to your score is that the older it is the better it gets. 15% may look like a small amount, but, this information is important to creditors. It may even impact your chances of getting a loan or not.
The length of your credit history will take 3 things into account:
- How long your accounts have been open for. This also includes the age of your oldest account, newest account and the average age of all your accounts.
- How long a specific account has been open for.
- The last time you’ve made use of the account.
Although your score takes time to accumulate, there’s a catch-22.
You need credit to get credit, and you’re going to struggle to open an account without a good enough score.
But there’s hope. You can get around this in a few ways.
- Applying for a secured debt
A secured credit card allows you to limit yourself to how much you’ll be able to spend. The good news is that your record will look at secured debt the same as unsecured debt.
That means you can build up your credit history.
- Get a co-applicant
You can ask a family member to help you by being the co-applicant on your loan agreement. Alternatively, you can ask them to authorize you to their credit card. This is a tall order, but it will help you establish a credit history.
- Use your credit card the smart way
You can build a good score by using your credit card smartly.
Keep your credit card balance low and pay in full on time. This will help you build a strong history in a short time.
Credit Mix (10%)
Your number will change depending on the types of credit you owe.
Including credit cards, store cards, instalment loans, finance company accounts and mortgage loans. You don’t need one of each account to accumulate a good score that’s a bad idea. If you don’t need or can’t afford a specific account, don’t open it.
What influences your credit mix?
- Managing credit cards
Having a credit card with a good history is great for your overall score. But, managing your credit card is key.
Paying your credit card in full each month will be in your favour.
Consumers with a good credit card history are less risky than those who don’t have a credit card at all.
- The type of account
Your score will increase if you have diverse accounts. Having experience in revolving and instalment type credit may improve your overall record.
- Opening and closing accounts
The number of accounts you have will impact your total score. If the system picks up that you have too many accounts, you’ll be negatively affected. And closing accounts won’t help you either.
Closing an account will impact your score. Closing accounts is not a bad thing but knowing when to open and close accounts is important.
Only do so when you need to.
New credit (10%)
Creditors make a note every time you inquire about credit. Inquiries will show on your credit report for 2 years. Luckily your 3 digit number only considers the last 12 months.
Making too much debt in a short space of time will indicate that you are a risky customer. It may show that you are in financial trouble.
How does new credit affect your score?
- Checking your report
Your score does not get affected when you check your report. As long as you sign up to a creditable bureau, you’ll be good.
- The number of accounts you have
Your account looks at how many new accounts you have and which type of accounts they are. Having more than one type of account would be beneficial if you can afford it.
- Be cautious when opening a new account
The last thing you want to be doing is opening a bunch of accounts in a short amount of time. Every time you open a new account your average account age will drop, which will impact your score.
This goes for everyone, even if you have a long and healthy credit history.
- Credit shopping
Your record allows you to shop for good rates. You can apply for certain types of credit in a short amount of time without it affecting your score.
This only applies to accounts that involve rate-shopping, like mortgage or car loans.
How scoring models change?
Your 3 digit number is unique to you. Your score won’t include all the above-mentioned categories. For example, if you’ve only started making debt, your score will be affected differently.
As your credit report changes, so does your score.
It is important to note that these categories are only guidelines. Your score will depend on how you use and manage your debt.
Benefits of a good credit score
Knowing exactly what your number is and how it’s calculated is great, but how do you use it to your advantage?
Having a great score is important. It shows creditors that you’re more likely to be a good customer. Which will help you get better deals when applying for your next loan.
- Credit card and loan approval
A good score will increase your chances of getting approved for credit cards or loans. But, having a good report doesn’t guarantee approval.
Creditors will still look at your income and current debt before making a final decision. Having great results will help you apply for new credit with confidence.
- Gain negotiating power
A good score could allow you to negotiate better interest rates. You can take advantage of your bargaining power, by playing offers off one another.
You won’t have this benefit if you have a bad score.
- Great credit card deals
A strong score will help you get great deals, such as low-interest rates, rewards and cash backs. The lower your interest rates, the sooner you’ll be able to pay off your accounts.
You’ll want to use your credit card more often because of these benefits. Which will help boost your score – as long as you pay on time.
- Improve your financial trustworthiness
Various industries use your score. Your landlord may look into your financial trustworthiness before accepting your tenant application. Your score will tell if you’re likely to pay on time or not.
- Get better insurance rates
Some car insurance companies use your score to calculate your monthly premium. The better your credit score, the better deal you’ll strike.
You won’t get turned down because of a bad score but having a good score will help save a little.
Your score is important for a lot of reasons. Most importantly, your score could mean the difference between getting approved for a loan or not. Your score will allow you get better interest rates on new loans, card rewards or even give you some negotiating power.
The bottom line is that your credit report and your score are key when applying for new credit or loans. It has the power to influence your financial situation dramatically.
It’s good practice to keep your score as high as possible. But, sometimes that can be tricky, especially if you’re struggling to off your debt on time.
Contact us today if you’re struggling to keep up with your repayments and you need financial relief. We’ll help you reduce your monthly repayments while protecting you against legal action.