South Africa has a difficult relationship with credit. From national debt at the highest levels of society, to some of the highest levels of personal debt in the world behind closed doors, we are a nation of borrowers - and debtors too.
In 2012, the South African Financial Services Board (FSB) published statistics indicating that the Rainbow Nation currently has a financial literacy rate of 51%. Although 51% may meet the (fairly low) criteria to be considered “financially literate”, 49% of us still fall short. Even among the supposedly money-savvy contingent, many of us still struggle with the basics; from understanding APRs (Annual Percentage Rates) to getting to grips with our credit ratings.
Our credit ratings, particularly, lie at the heart of our national debt problem - and our financial literacy issues. Many South Africans make heavy use of financial products, like loans and credit cards, with little thought for the effect these products have on our credit report.
By the same measure, many of us aren’t aware that credit scores exist or that they have a knock-on impact on our future borrowing. It isn’t until our mortgage application is turned down or a phone provider won’t offer us a contract that we realise the real-world effect of our use (and abuse) of credit.
Time to bone up! Ready to get to grips with your credit score and learn how to manage it responsibly? Let’s get started.
What is my credit score?
Let’s kick off with the basics. Every adult who has ever used credit will have a credit report. Credit can be anything like a short-term loan, to buying a car using a finance agreement. When you apply for a new credit product, your potential lender will check your credit report to find out whether or not you are likely to use their product responsibly (i.e. repay your debt on time).
In South Africa, credit scores can range from 330 to 850, with higher scores identifying very responsible borrowers and lower scores suggesting less responsible borrowers. In the eyes of creditors, however, scores are viewed like this:
- 800+ - Exceptional
- 740 to 799 - Excellent
- 670 to 739 - Very Good
- 580 to 669 - Good
- 579 & below -Poor
There are many things which can affect your credit score positively and negatively, but “black marks” such as missed payments, late payments and other repayment issues will send your score plummeting.
Why is it important?
Having at least a “good” credit rating will make a considerable difference to your life in both practical and financial terms. At this level, you are likely to be approved for most basic financial products - although you may not have access to special rates and high-level products (you’ll need a very good or excellent score for this).
By contrast, a poor or very poor score will make it much more difficult to access credit products such as loans and mortgages. From putting your life plans on hold (perhaps you require finance to re-enter adult education), to preventing you from purchasing a vehicle via a finance plan, or making your mortgage much, much more expensive, a less than perfect credit score can be a real thorn in your side, and cost you extra too. You can find out more about the consequences of a low credit score here.
How to get a good credit score
So how can you get a good credit score - and how can you maintain it? Below you’ll find a few helpful tips you might want to consider following to help you achieve the best possible credit score for you.
Bear in mind that, if your credit score is already low, it can take a long time to repair the damage and restore your record to a level lenders feel comfortable with.
1. Know the score
Knowledge is power. Even if the news is bad, knowing what your credit score is gives you the power to change it - or maintain it. Companies like Experian offer free credit checks (just watch out for sneaky extra charges).
2. Leave love out of it
In the first flushes of love it’s tempting to dive in feet first and totally meld your lives - including your finances. Unfortunately, if Mr or Ms Perfect have a less-than-perfect credit history it can mean big trouble for your credit score - especially if your joint finances take a turn for the worse.
3. Don’t max out
If you’re using a financial product, like a credit card, don’t push it to the limit each month. This can be a sign of reckless spending or unbalanced finances. Use no more than 75% to make your credit use appear more measured and responsible.
4. Get stable
A globetrotting, risk-taking existence may sound exciting, but it’s no good for those looking to improve credit scores. Regular changes of address, job changes and other indicators of stability can all affect your credit rating.