Some have dubbed it 'Cyril's economy'.
Whomever it is being seen to drive monetary policy and economic stability in SA, the reality remains the same for many South Africans.
Many who committed to credit agreements, spurred on by the optimism of historically low repo rates, are now coming to grips with inflation.
The cost of living is high and we are drowning in debt. If you, like many financially over-committed consumers tend to burrow rather than tackle the debt proactively, you are doing yourself a disservice.
Although 67% of respondents check their credit reports at least quarterly, 13% don’t know their credit score, according to TransUnion’s 2023 Consumer Pulse report.
A credit score is a crucial aspect of anyone’s financial life that can open doors to favourable loan terms, lower interest rates, and job opportunities, Wilhelm Koster, Divisional Executive: Retail Credit at Capitec, tells Drum.
He shares quick tips to help South Africans understand, improve, and maintain a healthy credit score.
"A credit score is a three-digit number reflecting how likely you are to pay back loans on time based on how you've managed your financial accounts," Wilhelm explains.
"It allows lenders to assess your level of risk when you apply for credit. In South Africa, four main credit bureaus calculate credit scores:
- Experian,
- TransUnion,
- Compuscan and
- XDS.
Each uses a slightly different scoring model, but they consider similar factors. At Capitec, we use the Experian credit score, which ranges from 0 to 740."
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So, what is considered a good credit score?
"A score above 650 is considered favourable," Wilhelm says.
"Anything above 700 is considered excellent and will likely qualify you for the best loan terms and lowest interest rates. A score below 600 may make it more difficult to get credit. However, don't despair if your score isn't quite where you want it to be. By understanding the factors that influence your score and adopting responsible financial habits, you can gradually improve it over time.”
- Missed payments
Late or missed payments can significantly hurt your score, Wilhelm warns.
“If you fail to pay a debt on time, it'll negatively affect your credit report and score. Your account could also be marked as 'default' if you miss multiple payments. Different lenders have varying rules on missed payments before declaring default. Defaulting carries a harsher penalty on your credit score than simply missing a payment. These marks stay on your credit report for five years.”
- Credit utilisation
The amount of credit being utilised compared to your total credit available can affect your credit score.
High credit utilisation suggests financial strain and may negatively impact your credit score.
“For instance, if you have a credit card with a limit of R20 000 and use R10 000, your credit utilisation rate is 50%. Financial experts often recommend keeping this ratio below 30% to maintain a healthy credit score.”
- Length/age of credit history
A longer credit history demonstrates a track record of responsible credit management, which can positively impact your credit score.
“Banks and lenders prefer lending to reliable individuals with stable repayment histories that can repay any debts. One indicator of stability is the age of your credit accounts. They value accounts held for several years, indicating trustworthiness over time. Having an older credit account can boost your credit score, while mainly holding new accounts may lower it.”
- New credit applications
Applying for credit now and then won't impact your credit score. However, submitting multiple applications in a brief timeframe could hurt your score.
“Too many applications within a short time signals to lenders that you might be experiencing financial trouble, negatively impacting your score. So, apply for new credit wisely and sparingly,” says Wilhelm.
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- How to build a healthy credit record
Someone with no credit history can start building a healthy credit record by opening a bank account and using it daily to practise managing their money and staying current on payments, like rent, water, and other bills, say Wilhelm Koster, Divisional Executive: Retail Credit at Capitec.
“Maintaining a positive balance in your transactional account can be beneficial. You can apply for a low-limit credit card with manageable monthly payments once you've established responsible habits with your transactional account.”
Healthy credit users use their credit card for purchases and pay off the balance after receiving their statement. This demonstrates responsible credit repayment behaviour and helps build your credit score.
Common mistakes that can hurt your credit score, Wilhelm adds.
"One of the most common mistakes people make that harms their credit record is not tracking their spending and letting their debt get out of control."
- Setting up automatic payments to avoid late payments
- Keeping credit utilisation low
- Paying more than the minimum amount due on credit cards every month
- Limiting new credit applications to only when necessary
- Regularly checking your credit report for errors and signs of identity theft
- South Africans should review their credit report at least once a year, the review doesn’t impact their score.
Individuals can also lodge a dispute if they suspect inaccurate information on their credit report.
“Capitec believes in empowering our clients with the tools and knowledge to make smart financial decisions. That’s why we offer access to your credit rating on the Capitec banking app, our Live Better Academy, or our MoneyUp Chat on WhatsApp at 087 240 5757.
“We also encourage South Africans to communicate with creditors if they're facing financial difficulties. They may be willing to work out a repayment plan. Building and maintaining a good credit score is a marathon, not a sprint.”
