Protect your credit score in tough times
When times are tough and your budget is being stretched, it's tempting to skip a monthly payment here or there. But, did you know that missing payments, paying late, or having even minor arrears on a card or account, could negatively impact your credit score and affect your chances of buying big-ticket items like a car or home in future?
Owning an asset like a home is a significant milestone in life, but it requires financial stability and planning. This includes having a good credit score so that you can apply for a home loan.
If you have applied for credit in the past - for example, by opening an account at a clothing store, or taking out a cell phone contract - you will have a credit record and a credit score. Your credit score is used by financial institutions, like banks, to assess your creditworthiness and how much risk you pose, when they decide whether to lend you money or not.
Maintaining a healthy credit score is important because it plays a significant role in determining your eligibility for a variety of things, from buying a home or a car, to negotiating insurance premiums, and more.
Making your credit score count
A good credit score demonstrates your financial responsibility and shows financial institutions that you are likely to repay your debt on time. This makes you a more attractive candidate for a loan because you pose less of a risk for lenders like banks.
Carl Coetzee, CEO of BetterBond, says making sure that your credit record is in good shape is a much-underrated consideration by aspirant homebuyers. "When you apply for a home loan, your credit score could make a huge difference. It could result in a lower interest rate and better terms on your home loan. This saves you thousands of rands over the term of your home loan, which is usually 20 years. Having a good credit score is one of the most important things that banks look at when calculating your home loan affordability," he explains.
To make sure that your credit score stays healthy, keep in mind a handful of things:
Pay on time
Late payments are one of the biggest contributors to poor credit. Even minor arrears of a few hundred rands could impact your rating and cause a credit application to be declined.
"Don't underestimate the influence of this small detail on your eligibility for a home loan. Banks are cautious about lending to someone who has even the slightest arrears to their name in terms of paying their monthly dues, so don't let this trip you up. Always make your account payments on time and in full" Coetzee advises.
Manage your debt well
Debt can benefit your credit score. Make your debt work for you by having a mix of credit, such as clothing or retail store accounts, a cell phone contract, vehicle finance, etc. - and always pay them in full and on time.
"If you're careful about your account payments, they will contribute positively to your credit rating, and help you to establish a healthy credit history," explains Coetzee.
Think twice about applying for different types of credit within weeks or months. Every time you apply, it is logged as an inquiry on your credit report, and multiple inquiries over short periods of time could lower your credit score.
Use credit cards wisely
A credit card can be a force for good if you use it with care and keep up your monthly repayments. "It is not only about having the credit, but how you manage it that tells the bank a lot about you and how you could one day manage a home loan," says Coetzee.
Keep yourself in good standing by not maxing out all your available credit. Financial institutions consider the ratio of your outstanding debt to your available credit, so use credit cards sparingly and, if possible, pay them off in full each month. According to the Experian Credit Bureau, a good rate at which to use credit, is below 30%. In other words, if you have a credit limit of R10,000, use only R3,000 of it.
Check your credit score
Your credit report contains information about your credit history, including any missed payments or defaults. You can view your credit score online and access your credit report free of charge via various credit bureaus.
"It's a smart move to review your credit report regularly, to ensure that all information is accurate and up to date," says Coetzee. "Get a detailed breakdown of past and present accounts, use the dispute function to query or clarify your information, and get advice to improve your credit score and raise your credit rating if it needs a bit of work. Remember, a good credit score is important for your overall financial well-being, so keep an eye on it and maintain it to the best of your ability."
Talk to the experts
BetterBond can tell you your home loan affordability by doing a health check on your finances. "We review your income and expenses and can pre-approve you for a home loan so you know what you can afford to spend," says Coetzee. "Buying property is an investment into your financial future. By taking an honest look at your credit score, you place yourself in the strongest position to maximise your financial potential."