Most South Africans require a loan from a financial institution when making a very large purchase, such as a car or a house. You need a good credit score in order to secure the loan you need. The same applies if you want a smaller loan, a credit card, or even if you want to open a clothing account. If you do not have a good credit score, the chances are that your loan or credit application will be declined. Knowing how much credit you qualify for (if any) and how you can improve your credit score may just be critical to your ability to continue improving your life over the long term.
This week's newsletter looks at what a good credit score looks like and offers a small guide on how to improve your credit score.
CREDIT ACTIVITY IN SOUTH AFRICA
Approximately 120 000 new credit-active consumers debuted on the credit bureaus in South Africa during the first quarter of 2021. Still wary from job losses and income shocks, credit bureaus report a 5.38m decrease in the number of accounts from over 90m the previous quarter – more credit-active consumers with fewer accounts.
Collectively, credit bureaus hold records on 27.53m credit-active consumers profiling their 85.09m credit agreements with consumers having borrowed R2.04tr from our credit providers. (excerpt: News24.com)
According to a recent survey carried out by Deb Rescue, 73% of South Africans will develop serious economic complications by the end of 2022 for not being able to make ends meet. This same survey showed that a striking 76% of South Africans' income is used for paying off debt.
Consumers ages 18-54 are among the most engaged in managing their credit. In fact, more than 64 percent of respondents in this age range say they are actively trying to improve their credit score. And of those, 43 percent say their credit score has improved over the past year. (excerpt: Transunion)
Bad debt is soaring in South Africa; bad debt on credit cards has risen by 72% and on personal loans by 46%. Almost half of 25.1 million credit consumers in SA are behind on payments, and at last count, 39.1% of credit consumers visible to the formal system had an account overdue and a weak credit score. So, what is a credit score exactly, and why is it so important?
WHAT IS A CREDIT SCORE & WHO CALCULATES IT?
You'll most likely have a credit score if you have ever taken out a loan, registered a bond for a house, applied for a credit card, or even a cellphone contract or clothing account. Your credit score is a three-digit number between 000 and 999 that tells the bank or financial institution how much of a risk you are.
It is one of the most significant factors in determining whether you get approved for credit. Your credit score tells prospective lenders how much of a 'risk' you are in terms of your past debt repayment behavior.
A credit bureau calculates your credit score and while it is based on your credit report, it also takes into account the following factors:
Your debt repayment history.
Amounts owed.
Types of credit applied for and how often.
How long your accounts have been open.
How much of your available credit you're using.
Whether there is any history of you not honoring a debt obligation that resulted in bankruptcy or a judgment against you.
Finally, how all of the above compares to other credit active consumers in South Africa.
The credit bureau looks at your transactional records and then gives you a score, ranking you as low, medium, or high risk. Your credit score is a living number that fluctuates depending on your debt repayment behavior across your different listed accounts. This means that the better your credit score, the better the loans and interest rates you can access.
WHAT IS A GOOD CREDIT SCORE?
We mentioned that a credit score is a three-digit number ranging from 0 to 999. Below is what those numbers mean:
767 - 999 = Excellent
681 - 766 = Good
614 - 680 = Favorable
583 – 613 = Average
527 – 582 = Below Average
487 - 526 = Unfavorable
0- 486 = Poor
You need a credit score of at least 600 for the bank to consider a home loan application, while anything above 650 is considered a good score.
CREDIT SCORES MATTER
If you have a good or excellent credit score, lenders will typically offer you loans at the prime lending rate, which is the interest rate used by banks and is fixed, so it won't change unless the repo rate changes. Customers with very good and excellent credit scores may get prime -1% or -2%, and customers with poor credit may get up to prime +3.
Jackie Smith, head of the Customer Contact Centre at Ooba, says a strong credit score could potentially save you hundreds of thousands of rands if you're buying a new home as it enables you to negotiate a lower interest rate.
The table below shows the impact of different interest rates using the example of a R1.5 million home loan, paid off over 20 years. An individual with a Prime +2% interest rate would pay an estimated R677,351 more than someone who secured a Prime -1% interest rate.
The numbers used below are for illustrative purposes only; other costs may be included as well:
Financing your vehicle is similar. If you bought a car for R200 000 and paid it off over five years, your total repayment would be R237 627, 59 at prime -1%, and R259 415,44 at prime +3%.
YOUR LOAN APPLICATION WAS DECLINED: HOW CAN YOU IMPROVE YOUR CHANCES AND CREDIT SCORE?
There are three main factors to take into account when asking for a loan:
Your budget
The reliability of the financial company.
Your credit score
Budgeting
Budgeting can be your best tool for maintaining safe financial behavior. The money left over after the deduction of all of your expenses from your income is the money you can use for other costs, such as paying off a loan.
Not establishing a budget is one of the most common mistakes made by South Africans. They ask for a loan, and then they cannot pay the monthly installments. Or worse, they ask for a second loan to pay off the first loan, resulting in a snowball effect. This irresponsible lending activity can lead to a lower credit score.
Reliability of Credit Institutions
On the other hand, finding out how reliable a credit company is can be just as important as drawing up a budget for yourself. Asking for an online loan at renowned credit companies or banks will keep you on the safe side.
Improve Your Credit Score
If you have a low credit score and are struggling to secure a loan, then the best thing to do is improve your credit score before applying again.
Below is what you can do to improve your credit score:
Pay outstanding bills.
Pay all your incoming bills on time.
Pay more than just the minimum installment on your bills.
Pay off credit card debt.
Avoid spending up to your credit limit on your credit card and store accounts. Always try to spend at most 35% of your available credit.
Pay off store credit, cell phone accounts, and bank loans – especially for other assets, such as a car.
Refrain from opening new credit accounts where possible.
Check your credit report for inaccuracies and take it up with whichever credit bureau performed the calculation.
Close your accounts when you’ve paid the balance owing.
According to businesstech.co.za, improvements usually start showing up on the credit record after three months, but it’s recommended to wait six months before reapplying.
A PUSH IN THE RIGHT DIRECTION WITH A FINANCIAL ADVISOR Suppose drafting a budget is challenging, or perhaps you cannot find the right balance between your expenses and income, risking your payment capability and credit score. In that case, a personal financial advisor can step in to assist you. Create a brighter, more prosperous future when you plan your finances properly. If you need assistance with financial planning and a realistic approach that works for you, then contact Wallstreet Financial Services. We can help you plan the right way and help you improve your credit score.
April 26, 2022