In a recent post, I shared a bit about the difference between good and bad debt. While you should try to avoid debt as far as possible, there are forms of debt which are necessary and therefore considered to be good debt, an example being a home loan.
As a follow up to that post, I thought I’d share some tips on how to maintain a good credit score. Let’s start by defining what a credit score is.
WHAT IS A CREDIT SCORE?
At its most basic level, a credit score is an estimate of a person or organisation’s ability to repay money they have borrowed based on their previous payment history. A high credit score indicates that the person wanting to borrow money has a good track record; and will pay it back within the agreed time. A low score suggests that the borrower has had trouble with making payments in the past and might have similar problems in the future.
**Your Credit Bureau score is calculated using a formula that evaluates how well or badly you pay your bills, how much debt you carry and how all of that stacks up against other borrowers. In effect, it tells you in a single number what your credit report says about your management of existing credit.
Generally, the higher your score, the better. A TransUnion Consumer Credit Score, for example, can range from 0 to 999 or from poor to excellent. The following score bands are defined for the score:
• EXCELLENT: 767 – 999
• GOOD: 681 – 766
• FAVOURABLE: 614 – 680
• AVERAGE: 583 – 613
• BELOW AVERAGE: 527 – 582
• UNFAVOURABLE: 487 – 526
• POOR: 0 – 486
Having a healthy credit score is vital, particularly when applying for a home loan. Credit-scoring methods differ between credit providers, but all of them will check your payment behaviour and/or patterns, specific negative information on your report and your credit application history. Improving your score is probably not as difficult as you think. See tips below.
TIPS TO MAINAIN A GOOD CREDIT SCORE
Pay the amount due on every one of your accounts in full and on time, every time. Whether you have a credit card, a store account, a cellphone contract or all of the above, a record of your monthly payment history on each of these accounts is stored on your credit report for 24 months. “If you skipped a payment 13 months ago on your credit card, it is recorded on your profile,” explains Salem Dyafta, brand manager for consumer at credit bureau, Transunion.
Use credit cards prudently – as tempting as this may be, do not use all your available credit to the maximum allowed; manage your debts responsibly; and avoid applying for too much credit within a short timeframe.
Check your credit report: South Africans are entitled to a free credit report each year. You can get one from any of the major credit bureaus. It will tell you your score and more importantly, you can check for any mistakes and try to correct them.
Reduce what you owe: Use the credit report to list all your debts. Arrange these according to the interest rates charged on each. Try to pay off the ones with the highest interest rates first (usually credit cards and personal loans), while maintaining the minimum payments on your other accounts.
Pay off debt rather than moving it around – Limit revolving debt such as credit cards. Do not apply for credit cards or open store accounts to increase your available credit.
Outstanding debts will stay on your record – If an account is overdue it will negatively affect your score. Making any payments or paying it off completely will not clear your credit record, but will improve your credit score.
As mentioned above, under the National Credit Act (NCA), you are entitled to one free credit report per year and have the right to challenge information on your credit report if you believe it to be incorrect. To access a free report, visit www.transunion.co.za; www.compuscan.co.za; www.experian.co.za; or www.xds.co.za.
Disclaimer: The article is provided for general information purposes only. Whilst care has been taken to ensure accuracy, the content provided is not intended to stand alone as financial advice. An expert should be consulted for advice based on the facts and circumstances of each transaction/case.