How to make your credit score work for you and not against you

It is well worth investing the time to understand how a credit score works amid the high cost of living, according to Neil Roets, the CEO of Debt Rescue.

his as South Africans are staggering under the weight of sky-rocketing petrol, electricity and food prices, with many incurring more debt to cope with the additional cost of living expenses.

South Africa’s household finances came under increased pressure in the second quarter of this year as individuals reported that their savings, incomes and ability to service debt deteriorated in the consumer vulnerability index published end of July by Unisa/Momentum.

Annabel Bishop, the chief economist at Investec, said in a note that Statistics SA showed the cost of living rose substantially, to 7.4 percent year on year (y/y) by June, from an increase of 5.9 percent y/y in May, cutting into South African’s real disposable incomes, while the petrol price rose by R2.57 to the dollar and that of diesel by R3.61 to the dollar over the second quarter.

Furthermore, the TransUnion quarter one 2022 South Africa Industry Insights Report showed a notable increase in unsecured lending originations – indicating a renewed demand for credit by consumers.

According to a TransUnion credit bureau survey, more than 72 percent of South Africans agree that their credit score is important to them, yet only 45 percent say they understand how credit reports are generated.

Roets said the obvious solution seemed to be to use credit and store cards to buy necessities like food and petrol to see them through the month.

Roets offers tips on how to build and keep a good credit record.

Firstly, he said, a credit score, also known as a credit rating, was a number that reflected how likely you were to repay money you wanted to borrow.

Lenders like banks and credit card companies will look at your credit profile and calculate your credit score based on the information shared with them by the credit bureaus. This will show them the predicted level of risk in lending money to you. The higher your credit score, the better your chances of being accepted for credit, and the more likely you are to get the best rates.

So, how can you make your credit score work for you instead of against you?

Roets said: “The first step is to build a good credit record. This is far easier than most people think – and will stand you in good stead to make those big purchases that are synonymous with the distinctive stages of our lives – buying your first car, taking on that sizeable study loan that will set your career on the right path, and purchasing your first home.”

A few key factors can affect your credit record – either positively or negatively:

  • Repayment history is a strong factor in scoring – so make sure you pay your instalments on time and never skip a payment.
  • Credit usage of your credit cards and store cards is another important factor. If you are using 30 percent or more of the credit line available to you, it will be viewed as an indication of risk.
  • Length of credit history is another important scoring factor, so it’s a good idea to apply for credit and store cards as soon as you are eligible.
  • Another scoring factor is a mix of credit. Different weightings are attached to different types of accounts.
  • Scores also look at new credit. Rather don’t apply for credit too often, as each application can potentially affect your credit score – this pertains especially to those who do not have a lot of credit history.
  • Credit contraventions that lead to court orders, administration orders and judgments against you can seriously affect your credit score for lengthy periods of time.

Roets said: “The way you manage your debt will ultimately be the deciding factor between a bad credit score or a good rating.”

He said it was deeply distressing to see the impact on families of the rising living costs.

“Incurring more debt is simply not the answer, though,” adding that store cards seemed attractive, but they were also addictive because they made it seem easy to buy now and pay later, but you would pay exorbitant interest rates later.

“My advice to those who have fallen into a debt trap is to remember that you are not alone. Seek help from a registered debt counsellor who can assist you to manage your financial predicament. It is possible to do this with minimal damage to your credit record,” he said.

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