A credit score is a ranking between 0-999. It is a system relied on by bankers to basically determine how risky an individual is to lend money to.
It is calculated using your credit history, by determining how much money you have borrowed in the past and how much of it you have paid back on time.
Those who pay back diligently are determined to be of low risk to the lender, and thus are awarded a high credit score.
How is credit score calculated in South Africa?
As noted, your credit score is determined by your past debt repayment behavior. It is a number between 0-999 and in South Africa it is determined by a credit bureau, based on your transactions in all recognized banks.
Every South African in the financial system has this number, and banks will use it alongside other risk factors when deciding whether to award you a loan, and how much to award you.
This is how the numbers break down.
|Very low risk individual who can obtain credit easily, and at very low interest rates.
|600 – 650
|Low risk individual who can get the best loan programs are good interest rates.
|550 – 600
|Average individual who will receive good loan deals at acceptable rates.
|490 – 550
|High risk individual who will struggle to get a loan, and when they do, the interest rates are high.
|490 and below
|Extremely high risk individual who may not qualify for any loan. They should focus on improving their credit score.
Other than your debt repayment history, other factors go into the calculation of your credit score.
Here are some of them.
/ Amount owed.
/ How long your accounts have been open and active.
/ How much of your available credit you have utilized.
/ Types of credit applied for.
/ How often you apply for credit.
Basically, having a clean but almost dormant account will not help your credit score.
How to check your credit score in South Africa
There are several online tools to check your credit score in South Africa. Some are paid, some are free, but most have a freemium model where you can access some parts of the report, or generate limited number of reports before they charge you.
How to improve your credit score
The most basic step is ensuring you are prudent with your finances.
However, you will not be doing any favours to your credit score if you don’t build a profile. As mentioned, your credit score is calculated using your financial habits. You need to provide the financial institutions data to make a comprehensive assessment.
Instead of buying everything in cash, finance your vehicle, sign up for a phone contract., etc. The best one is to take a credit card, which you can then use in your day to day shopping.
The moment you show your bank that you take credit often and pay back on time, you are set for life.
Here are other tips to improve your credit score.
1. Avoid owing more than a third of your gross income on debt.
2. Don’t apply for more than one loan at a time. Unless in unusual circumstances, this is a signal of deteriorating financial situation.
3. Avoid spending up to your credit limit.
4. As much as possible, pay in full what you owe, instead of just paying the minimum installment.
5. Take a home loan so the lenders can assess your risk factor.
6. Close unused credit accounts.
7. Avoid using revolving credit accounts.
8. Take the same advise to your spouse, because their credit score need to be in good shape too eg. when applying for a home loan.
How to check if you are blacklisted
As mentioned, it is the credit bureaus’ work to keep a record of your credit history.
Based on what they see, they can take different steps, the worst of which is blacklisting. This basically happens when you default.
It is an extreme step that can seriously jeopardize your chances of getting credit. Estimates put the number of blacklisted South Africans at 6 million, which means financial exclusion at a massive scale.
If you suspect that you may be part of the statistic of blacklisted South Africans, there are several ways you can confirm.
Transunion credit bureau allows you to check on your cellphone by dialing *120*8801#.
Basically, almost all credit bureaus have a feature to check on your status, and advise on how to get yourself out.