How to keep your credit score healthy

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 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 over-indebtedness and will reduce your credit score further.”

This article originally appeared in the 26 November 2015 edition of finweek. Buy and download the magazine here

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