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The BIG Financial Decisions that Impact Your Credit Score

A credit score is a number indicative of your borrowing history and financial decisions to date, good or bad. Banks, financial institutions, retailers and other lenders use this credit score to assess loan affordability and potential risks based on your payment information on record.

Here is how it works: the higher the credit score, the better your credit health and the ability to finance your next purchase or secure that home loan. Consequently, a lower credit score poses more risk of having your loan application denied by creditors.

Usually, one or more of the following actions reflect negatively on your credit profile.

  • Negative payment record, e.g. missed or late payments
  • Short credit history or not enough credit data
  • Few or an insufficient number of credit accounts
  • Frequent credit enquiries and new account applications
  • A high debt ratio and over-indebtedness
  • High outstanding balances close to the credit limit
  • Court judgments such as blacklisting or record of insolvency
  • Debt settlement versus paying off debt in full
  • Debt consolidation (temporarily)

How do payment records impact the credit score?

When the credit bureau calculates your credit score (a number between 0 and 999), it looks at your credit profile, which shows every time you borrow money from a lender, how much debt you’ve incurred to date, and how well you manage the existing repayments.

Missing payments regularly or not paying on time negatively affects your credit report and lowers the credit score, resulting in the inability to access more credit when you need it.

Negative repayment history can still reflect for a couple of years on the credit profile, even after making amends! Worse, non-payment can lead to court judgment, blacklisting, asset repossession and insolvency, all with damaging effects on credit scoring.

How is credit history influencing credit score?

Your credit score may be lower than expected due to reasons other than a negative payment record. The length of your credit record is key. If the credit profile is new or less than six years old, creditors will not have sufficient data to calculate the total credit score and validate your loan application.

Similarly, having a low number of credit accounts may also provide insufficient data. However, the opposite can be detrimental to your credit score, too. Frequent credit enquiries, multiple loan applications and credit accounts obtained within a relatively short period indicate that you may be at higher risk of over-indebtedness and non-payment.

Can paying off debt improve the credit score?

Too much debt or a high debt ratio hurts your credit score and reduces the chances of getting future loans approved. Lenders can easily reject new applications if your profile shows increasing outstanding balances or if you are dangerously reaching the credit limit on one or more current credit accounts. Paying off debt in full as soon as possible can only improve your credit score in the long term.

Does settling debt help increase credit score?

Debt settlement or settling the debt, not to be confused with paying off the debt in full, means that you have negotiated with the lender to pay an agreed portion of the entire balance – a lump sum – instead of the total owed amount on the initial loan.

Settling a debt won’t damage the credit report as much as not paying the debt at all, but having the debt settled is still considered negative in calculating your credit score. If possible, make alternative arrangements with your creditors to repay the whole amount in full instead of settling, either via a debt review or debt consolidation plan.

Can debt consolidation loans affect credit score?

Consolidating debt, or combining all your debt payments into one single monthly payment, can positively impact the credit score (compared to debt settlement, for example). Overall, taking a debt consolidation loan can be beneficial as long as it is used to completely pay off the existing debts and not incur additional debt during this time.

While you may notice a slight dip in your credit score at first (you are applying for a new loan with more favourable terms, after all, to replace all your other loans), creditors view debt consolidation as a positive action, long-term, to clear off your debt. Your credit score is only temporarily affected, a small price to pay for getting out of debt, eventually!

Pay attention to the new terms of the debt consolidation loan, though. Negotiating an affordable monthly repayment at a lower interest rate is preferable, but if you already have a low credit rating, you may not be able to access a preferential low-interest rate at all. Consolidating the debt via a high-interest loan may be more damaging in the long run for your credit score, so get professional help.

Need assistance in reducing debt while maintaining a good credit rating? An ezDebt counsellor can advise on the best way to seek debt help without affecting your credit score or, at least, keep the debt consolidation impact on the credit score to a minimum.

Our professional ezDebt advisers can help you with debt repayments without affecting your credit score. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.


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