How to keep your credit score healthy

Your credit rat­ing has a mas­sive im­pact on your abil­ity to take on debt. fin­week gives you some tips on how to op­ti­mise your credit rat­ing.

Finweek English Edition - - NEWS - ed­i­to­rial@fin­week.co.za By Justine Olivier

a credit rat­ing is es­sen­tially a con­sumer’s fi­nan­cial rep­u­ta­tion, ac­cord­ing to con­sumer fi­nance busi­ness RCS. “Your credit rat­ing ul­ti­mately de­ter­mines the cost of your debt,” ex­plains Craig Gradidge, cer­ti­fied fi­nan­cial plan­ner and co-founder of Gradidge-Mahura In­vest­ments. “A per­son with a good credit record is at­trac­tive to a bank, and the banks will com­pete for their credit busi­ness by offering them bet­ter rates than the other banks – pro­vided that the in­di­vid­ual shops around to se­cure a good rate.”

It is there­fore im­por­tant to check your credit rat­ing at least once a year to en­sure that the in­for­ma­tion is ac­cu­rate. This en­sures that in­cor­rect in­for­ma­tion is not held against you when you ap­ply for credit.

For the quar­ter ended June 2015, over 157 000 credit re­ports were is­sued to con­sumers at their re­quest. This is out of a to­tal of 23.4m credit-ac­tive con­sumers in South Africa, says Mpho Rama­pala, man­ager: ed­u­ca­tion and com­mu­ni­ca­tion at the Na­tional Credit Reg­u­la­tor. The num­ber of re­ports is­sued was down 25.4% year-on-year, Rama­pala ex­plains. This is an in­di­ca­tion that now even fewer peo­ple are aware of their credit sta­tus.

Mis­takes to avoid

“One of the big­gest mis­takes peo­ple make is over-com­mit­ting them­selves to debt,” says Gradidge. “They of­ten do not con­sider af­ford­abil­ity of their debt if in­ter­est rates were higher. So they take on debt un­der the as­sump­tion that re­pay­ments will re­main at the same level for the full pe­riod of the debt. In­vari­ably in­ter­est rates go up, and sud­denly they are faced with af­ford­abil­ity is­sues.”

RCS advises you to pay your debt on time, adding: “Try to keep your debt lower than 20% of your yearly in­come for re­tail credit; and talk to your cred­i­tors if you are hav­ing a hard time pay­ing – you can rear­range your pay­ments.”

Ac­cord­ing to Gradidge, an­other big mis­take is to use debt to fund consumption, for ex­am­ple, by buy­ing gro­ceries with your credit card. “This is of­ten ex­pen­sive, un­se­cured debt, which piles up over time. By the time the per­son re­alises the prob­lem, they have a pile of ex­pen­sive debt, and noth­ing to show for that debt.”

RCS says: “Failed debit or­ders and ab­sence of pay­ment on your ac­count shows poor bud­get man­age­ment and low re­li­a­bil­ity, and not be­ing aware of in­ac­cu­rate in­for­ma­tion on your credit record.”

It is pos­si­ble to man­age debt suc­cess­fully and even work to­wards im­prov­ing your credit score, ac­cord­ing to FNB: “If you need as­sis­tance in get­ting on track with your fi­nances or if you find it dif­fi­cult to meet your pay­ments, con­tact your bank to dis­cuss pos­si­ble debt re­lief op­tions.”

FNB adds that even though not hav­ing a credit history may prove to be a prob­lem, “sud­denly open­ing a bunch of ac­counts in or­der to cre­ate a credit pro­file will ac­tu­ally cre­ate a neg­a­tive ef­fect on a credit score, as banks look at the longevity of your credit pro­file and the health thereof. Credit cards should also not be maxed out as this shows ei­ther poor fi­nan­cial dis­ci­pline or overindebt­ed­ness and will re­duce your credit score fur­ther.”

“One of the big­gest mis­takes peo­ple make is over-com­mit­ting them­selves to debt.”

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