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In the same way that countries are rated by their creditworthiness –how likely they are to pay back their debt and the rate of interest they need to pay– individuals also have a score which serves as a financial résumé of sorts. In this article, I’ll discuss what your credit score is and how to get a credit report in South Africa.
What is a credit score?
A credit score is simply a number to indicate how “risky” you are considered to be, in the eyes of financial institutions such as insurance companies, banks, landlords, service providers and employers.
Broadly speaking, the higher your score, the more trusted you are to repay your loans, earn a stable income and settle all your accounts in full when they are due.
If you have a low credit score, it might be very difficult, very expensive or impossible to get a loan for a home, car or side business. The more risk associated with you, the higher the interest will be that you need to pay back, which can cost you an awful lot over your lifetime.
You’ll save money with a good credit score
If you’re responsible with your finances, financial institutions want your business. With stable finances and a great credit score, you’ll find that you can often use it to negotiate lower interest rates on things like car and home loans.
If you’re in the market to buy a house, simply by saving half a percentage on the interest rate charged on a home loan can result in tens or even hundreds of thousands of rand saved in interest payments.
See the total savings below:
Even if you don’t think you’ll take out a loan anytime soon, you should still get your score to at least see where it is currently standing. It often takes years to improve your score. And if you’re not measuring it, you can’t manage it.
You can monitor for identity theft
Typically, fraudsters steal your information, open a credit card (or another credit account) in your name, use up all the available line of credit and then fail to make the payments. These add up red flags against your name and may only show up months or years later when you try to sign up for another, legitimate account.
It can take years to clear your name again, even if you’ve been a victim of identity theft.
A comprehensive credit report finds all the accounts opened in your name, how long they’ve been open and if they’ve been paid on time. It’s one of the simplest ways to see if someone stole your identity and is unknowingly ruining your credit reputation.
Included in most credit reports are:
- Your up to date personal information, such as physical address and phone number
- All accounts held in your name
- The number of credit enquiries by banks and other institutions, on your profile
- Accounts you thought you have closed (but remain open)
Get your credit report online
Getting a credit report in South Africa is fast and easy these days.
There are free credit reports available, but this is one of those things where you can (and should) spend just a little bit and get a comprehensive credit report. Free reports will just give you the basic information, but if you’re concerned about identity theft and serious about your finances, just get a paid report. It costs less than a round of drinks.
I recommend ClearScore. Their free, multi-page credit report gathers data from all the various big South African credit bureaux, including CompuScan, Experian, XDS and Transunion, used by almost all major financial institutions.
Step-by-step instructions to get your credit report
Interpreting your credit report
Each credit report will outline your credit score and give you an estimate of your credit health somewhere between “poor” and “excellent”.
In South Africa, Compuscan has a range between 540 to 710, TransUnion’s is between 300 and 850. The report, above, uses a blended rate, but they all will show you where you fall on the spectrum.
It will also show accounts that you might need to review, such as ones you closed in the past but still show as active.
Improving your credit score
Interestingly enough, you can’t improve your credit score without an actual credit account to your name. So, someone who only uses cash and a debit card might, after years of responsible finances, not have a credit score at all (rather than a good one, as you would expect).
You might also not have a credit score immediately after signing up for your first bank account or shortly after starting your first salaried job.
The easiest way to start building up your credit score is to apply for a small amount of credit: a utilities account, a small loan or a credit card with a low credit limit and zero monthly fees. Keep the account active, but most importantly: always pay it off in full, each and every time.
Note that with credit cards, the percentage of credit utilised can work against you. For instance: you have a credit card with a R5,000 overdraft and each month you spend and pay back the full R5,000. Good, right? Nope.
Despite settling in full each month, you’ve used up 100% of your available credit. This is considered risky financial behaviour; consistently needing and using all available credit will negatively affect your score.
If you are disciplined with your finances, you can ask for a higher credit limit on your card, say R20,000, and keep your spending the same amount (so you’re only using 25% of available credit). Or simply allocate a lower percentage of your monthly payments to your credit card, the rest can go on your debit card.
Home loans and accounts from institutions such as utilities and mobile phone providers will also have more of a positive impact on your credit score than loans from microlenders, which typically only lend to higher-risk customers.
The most important thing is not to avoid credit, but to manage it. You can’t manage what you can’t measure, so go ahead and get your first credit report.
It could save you millions in the long run.