A term that may bring about fear or anxiety.
What is a Credit Score? "A credit score is a number that indicates a person's creditworthiness. It's calculated using a formula that considers factors like payment history, debt, and length of credit history. Credit scores are used by lenders to determine whether to offer credit and how much to charge."
Most people know that it determines whether they qualify for a loan and what kind of interest rate they get, but don't know how it's calculated and how to check what their score is. If this is your understanding of credit scores, keep reading. We'll give you a summary of the five most important things you need to know about credit scores.
What is your credit score used for?
Financial institutions use your credit score to determine whether you qualify for a loan and how much interest you should pay. A high score indicates a low-risk borrower, while a low score means a high-risk borrower. The following is a rough guide to the Delphi system, as used by Experian, a global company that uses data, technology, and analytics to help businesses and consumers. They offer services that help with credit reporting, lending, and fraud prevention.
A range of Credit Scores and their effects
- 650+: Excellent credit - These individuals will easily be offered credit and receive very low interest rates.
- 600 - 650: Very good credit - These borrowers can get the best loan offers at a good rate.
- 550 - 600: Good credit - With this score you will receive good deals at an acceptable interest rate.
- 490- 550: Sub-prime - Having this core means you may struggle to get a loan and interest rates will be higher.
- 490 and below: A poor credit score - Individuals in this category may not qualify for loans and should put effort into improving their credit score.
What do credit bureaus look at?
We all have a credit report that contains a complete history of our financial transactions, including:
- Account information
- Payment history
- Amounts owed
- An age analysis of accounts
- Judgements
- Defaults
- CIPC Principal Links
- Property interests
- A list of occasions on which credit providers requested to view your credit report
These factors are a reliable indicator of how likely you are to honour your future credit commitments.
Do I need to start building a credit record to get a credit score?
The short answer – YES!
Your credit score is constantly changing, depending on the scoring systems of the different financial institutions. Each have their own way of calculating a credit score, but all rely on one thing: a credit record. Therefore, if you have no credit record, you won't have a credit score.
While this may seem like a good thing, it isn't!
Without lenders having a way of determining your risk level, they may opt not to give you a loan. You have to have a credit score to qualify for credit, and that means taking on small loans that are easy to qualify for and easy to pay back. If you're responsible about meeting your obligations in paying back such small loans, you can easily develop a good credit score.
How do I access my credit report and check my credit score?
South African citizens are entitled to one free credit report per year from one of the credit bureaus: TransUnion, Compuscan, Experian and XDS. If you want to get more than one credit report in a year, you can get a second from any of the previously mentioned credit bureaus for a minimal fee.
How do I improve my credit score?
You may find that your credit score isn't as you wish it to be. The good news is that there are a few simple steps you can take to improve your score. For starters, you can avoid paying late or missing payments. Just by paying on time, you display the kind of responsible behaviour that bureaus and institutions consider to be the mark of a lower risk borrower, leading to a higher credit score.
