finweek

10 credit-wise tips

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  • Do not ignore your debt.
  • Prioritise and pay your debt.
  • Avoid borrowing to pay off debt.
  • Cut down on your expenses.
  • Never skip repayments when under debt review.
  • Prioritise your home loan.
  • Always act on a letter of demand.
  • Approach credit providers when you cannot pay your debt.
  • Seek help from a debt counsellor.
  • Plan to save money every month. Credit scores are used by credit providers to determine the amount of credit to offer a consumer, and on what terms.

Understanding credit scores

A consumer’s credit score is calculated by a credit bureau based on a person’s credit report. The bureau considers how a consumer pays their bills, how much debt they have and how all of that compares to other credit-active consumers.

Each bureau has a different way of calculating the score. They take into account different forms of information, including information their organisation already has on you, or your employment circumstances. Major credit bureaus like TransUnion and Experian provide a free credit report once a year; consumers are advised to check their reports and immediately query any possible errors.

Reinhard Pettenburger, CEO of Debt Therapy and chairman of the Debt Counsellors Association of South Africa in the Western Cape, says one factor that may affect your credit score is the number of searches companies and banks have made because of multiple applications for credit or store cards.

“The thinking is that you have been trying everyone and everywhere to get credit, but you were not successful. If you were successful there would only have been one or two searches. This increases your risk and reduces your credit score.”

Another factor affecting consumer’s credit score is how long they have been in the same job and at the same address. Credit providers are looking for stability in consumer behaviour.

The record also shows on which accounts payments were made late, and for how long accounts have been in arrears. The consumer’s credit record also reflects default judgments.

Derick Cluley, head of international analytics company FICO’s Africa operations, says the single most important component of the credit score is the payment history, which makes up 40% of the total score. Late payments will reduce one’s credit score.

A high score means the consumer has a healthy credit record. It will make it easier to borrow money at a lower interest rate. 

This originally appeared as part of the cover story in the 10 May edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.

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