Most borrowers hardly bother to check their personal credit record and understand their credit score before applying for a loan and risking more debt when they shouldn’t. According to a Credit Bureau Monitor report, less than 3% of the 24 million credit-active South Africans check their free credit report annually, as entitled by law.
But viewing this report regularly and asking for your credit score is key to managing and improving your financial standing and debt levels. Keeping a healthy credit score gives you a fair advantage in securing better loan terms and showing credit responsibility to financial institutions and even potential employers.
Here is why good credit scores are so important and what to do about repairing bad credit.
What is a good credit score?
A credit score is a 3-digit number, from 0 to 999, which reflects your credit risk and eligibility for a loan. The number is calculated based on the statistical analysis of credit report data and the history of borrowing and repaying debts, as recorded by one of the four national credit bureaus: Experian, TransUnion, Compuscan and XDS.
The credit report provides essential information on how you manage your income and how much debt you service. This is your full credit history, which financial institutions use to measure the level of risk in affording you credit, and whether you can pay bills on time and in full each month.
Credit score ranges depend on the scoring model used to calculate them and your credit application’s goal, e.g. taking a personal loan, mortgage refinancing, obtaining a home loan or vehicle financing. Below is a general picture of different credit score ranges.
Excellent: 767 to 999
Good: 681 to 766
Favourable: 614 to 680
Average: 583 to 613
Below average: 527 to 582
Unfavourable: 487 to 526
Poor: 0 to 486
A high credit score means lower risk in borrowing money from lenders and banking institutions. By contrast, a low score poses a higher risk to creditors granting the loan, leading to a poor credit application outcome. This is why it’s essential to know your credit score range and understand credit affordability before incurring additional debt.
Let’s use the example of applying for a home loan. Scoring well above 680 shows a lower risk to creditors and puts you in an excellent position to secure the home loan, while a poor score under 500 gets you out of the property ownership race.
Why keep a good credit score?
As seen above, the higher the credit score, the lower the risk of borrowing money and having your application denied.
With a higher-than-average credit score (over 600):
- You show potential creditors and employers an excellent track record of your debt repayments and credit responsibility.
- You are more likely to get your home loan or car finance application approved.
- You can easily apply for an increase in your credit limit based on your favourable credit record.
- You will pay lower interest rates or fees when applying for more credit, which can mean considerable savings during the credit’s lifetime.
Therefore, maintaining a healthy credit score should be a priority to ensure future financial plans and debt management success.
How to repair a low credit score
An extremely low credit score could reflect a miscalculation or problem with the information contained in your credit report, which is why it is important to check the following before taking another loan.
- Confirm all credit report details are accurate and updated; there may be important missing information
- Ensure there are no outstanding late payments on your accounts
- Switch from manual to automated payments to not miss out on any loan repayments
- Close any unused or expired credit accounts that could hurt your scoring; you may have forgotten about them
Generally, a low credit score suggests a history of poor debt management and a high-risk factor of defaulting. In this case, we recommend repairing the credit score as soon as possible by getting rid of your existing debt. This can be done in more ways than one:
- paying off the debt all at once (this may be extremely difficult if you barely afford to cover your existing debts)
- settling the debt (agreeing with creditors to pay off a lower amount or lump sum than the initial debt, which can further damage the credit score)
- consolidating debt (taking a debt consolidation loan at more favourable terms to replace all your current loans)
A debt adviser can indicate the best options to tackle your growing debt problems and discuss their impact on your credit score. Depending on your profile and current debt ratio, a debt review process and consolidating debt can help your credit score.
ezDebt counsellors can provide that life-saving debt help without affecting your credit score in the long term.
How long does it take to repair bad credit?
There is no quick fix to a bad credit score. It all depends on where you start and how much damage you have to undo. Usually, it may take three to six months for credit repair to positively affect your credit score, pending dispute resolutions with the credit bureau.
Some actions could immediately boost your scoring, e.g. paying off your credit card debt and reducing the amount of usable credit facilities to less than 35% of your limit.
However, keep in mind that while the credit repair process may take less than six months, rebuilding your credit to an acceptable level may take much longer than that. You could be waiting up to a year until you see visible improvements in your credit score and be prepared to act on your next major financial decision.
Do you need assistance in reviewing and repairing your bad credit?
Our professional ezDebt advisers can help you stay on track with debt repayments through quick and affordable debt counselling. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.