A credit score is a number between 300 and 850 that depicts your creditworthiness. Banks and other credit providers use this number to assess whether you are good for a certain credit or not. A good credit score can get you the lowest interest rates while a bad one can get you the highest interest rates or just denied when applying for credit.
We all need to use credit at some point in our adult lives, everyone uses credit, both poor and wealthy people. You may need credit to buy a car, a home, other assets and even pay your children’s tuition fees. Wealthier individuals use credit for completely different purposes but they still use it.
Having a good credit score often means the difference between paying an interest of 2% or 16%. You can pay 8 times more interest than a person with a good credit score on the same amount of loan just because yours is bad. Having a bad credit score also means that you are not likely to get approved for financing important things like your home.
A credit score has a lot more impact on your finances than you might realise, not having a credit history at all is also bad. Credit institutions want to know that they can trust you to pay their money back, a credit score makes this easier for them.
Start building your credit score, especially if you are in your 20s, don’t wait till your thirties to start building a good credit score. Here is how to build a credit score in South Africa.
How to build a credit score in South Africa
Building a solid credit score takes time, it may take years before your credit score is around 800, which is considered a perfect credit score. There are a number of factors that credit institutions use to make up your credit score, those factors are discussed below.
1. Open a credit card account
You can open a credit account at Woolworths or any other fashion store, some credit accounts need you to have a minimum salary and require you to pay a monthly fee. You can take a student credit card, which is designed to help students build a credit history. You will still need to have a minimum monthly allowance, usually around R800 but won’t pay any fees.
2. Never miss a payment
The most important factor in your credit score is your payment history, don’t ever miss a payment. Not even once, this might result with you getting a 97% score on your payment history, which is not acceptable. Your payment history accounts for 35% of the overall score of your credit score.
Always make your payments on time, one late payment can hurt your chances of getting that perfect credit score. If it happens that you have 2 credit card accounts and miss one payment on just one of them but have kept them longer than 5 years then that one missed payment will not hurt badly as you will likely score 99% on payment history. But it’s always best to aim for that 100%.
3. Credit utilization
This just measures how much money you spend off the credit that is available to you. Don’t ever max out your credit limit, it just shows that you are not disciplined with your finances, try your best to utilize less than 30% of the credit that is available to you.
Credit utilization makes up 30% of your credit score, it’s very important to pay attention to it. It’s important to utilize the credit that is available to you so that a score can be made up, opening a credit account and not using it at all will work against you.
It’s often best to have many credit cards, this will increase the total credit that is available to you and decrease your overall credit utilization should you max out one of your credit cards. Ask for a limit increase every 6 to 12 months, don’t use the extra credit that is available, just use it to your advantage to keep the credit utilization down.
4. Credit history length
The amount of time that you have had with your credit cards makes up 15% of your credit score. The longer the better, that’s why most experts advise people to never close their credit card accounts. Your credit history length is calculated as an average, this means that if you opened a credit card 6 years ago then closed it and opened another one today; your overall credit history length will be 3 years.
Getting a perfect score on your credit history length may take you more than 9 years. That’s why we recommend students and 18-year olds’ to build up their credit as soon as possible.
5. Total credit lines
The total number of credit accounts that you have open will impact your credit score. The more the better, this counts for around 10% of your overall credit score. This sounds very confusing, why would credit bureaus reward you for having multiple accounts?
Having multiple credit accounts makes it easier for them to track your credit habits, apart from the low utilization score. They want to know whether or not you can handle different types of debt, your multiple credit accounts should not be just clothing accounts, there needs to be a mixture, a vehicle finance, mortgage loan, loan for buying furniture.
Conclusion
Building up a perfect credit score takes a very long time; it is not something you do overnight. Don’t be obsessed or constantly check your credit score, you can check your credit score for free online. Just stick to good credit practices and you will be just fine. Do you have any thoughts or questions? Comment below
