Your credit score plays a significant role in your lending ability. Furthermore, when it comes to making one of life's important purchases such as buying a house, your credit score will be looked at. But what is it and how can you improve your credit score to ensure that you do not hurt your lending ability in the future?
What is a credit score?
Credit scores are usually a three-digit number that ranges from 300 and 999 which will affect your lending ability. It is also what lenders look at to see your ability to pay bills on time. A credit score is calculated by using information from your credit reports, the amount of debt you may have and your payment history to see if you will be able to pay off a loan or credit. Having a good credit score can give you favourable terms when you borrow money.
What is a good credit score?
Credit scores can differ based on the credit scoring model that is used for a country. In South Africa the credit score ranges from 0 - 999. However, for a bank to even consider a home loan application you will need a score of at least 600. But what is a good credit score:
A good credit score can give you access to better interest rates for your loans or credit. It will also boost your chances of having your application approved which can be beneficial if you have a time frame in which you would like to complete something by.
What is a poor credit score?
Anything below 613 as a credit score is considered poor. It can affect your ability even to secure car financing. There are various reasons why someone might have a bad credit score. However, doing a regular check on your credit report can help you catch issues before they become bad. Seeking financial help in the form of a financial advisor, debt counselling or looking at ways to improve your credit score can help boost your credit score out of the red into one that is suitable for applying for credit.
How can you build it?
Stick to payments. Account payment history will impact your credit score. This means lenders can see if you have not been paying as you should. Therefore, making sure that you meet monthly payments is crucial. In months where you can pay more, do so to give you enough breathing room. Speak to your lenders if you are not able to make repayments to find a flexible financial plan.
Minimize debt. Taking on more debt when already struggling with existing debt can do more damage than good. Not only will it add to whatever financial stress you may be experiencing, but it could create a spiral of debt. Focus on paying off small debts and gradually working your way to paying off larger sums to make the process less overwhelming. Seeking debt counselling can also help you find a practical solution when it comes to tackling debt.
Cut back on accounts. Having a financial goal can make it easier to see what you need to cut back on. It will also come in handy when it comes to spotting areas in your finances that are causing you to bleed. Cutting back on accounts that you no longer use or need can help you save and also boost your credit score.
Be aware of the interest rate. A change in the interest rate can impact your repayments and affect your budget however, with a fixed interest rate you should be able to maintain your repayments at a set amount. Therefore, checking the conditions that come with credit or a loan is vital to financial planning, especially when it comes to repayments.
