South Africa has been downgraded over time to junk status. Our growing and unstable Debt-to-GDP ratio is a large reason for this. The issue has also received such extensive media attention, one would assume that South Africans would be more aware of their personal use of debt. However, we have some of the highest levels of personal debt in the world and a financial literacy rate of only around 50%.
Many South Africans use credit cards and apply for loans (home and vehicle) while being unaware that we as individuals also have a “credit rating”, just like our country does. For us, it’s known as our Credit Score. Some reports show that just under 5% of people actually check their credit score. Many are also not aware that this credit score has a significant impact on borrowing money. A lower credit score (a riskier individual) results in higher interest rates or leads to the inability to borrow. No one likes to pay more, let alone be denied credit.
Improving your credit score – quickly
Creditors, the institutions that lend you money, will report your credit information to Credit Bureaus, who issue you a credit score. The good news is that you can improve the information they report in the future and save yourself money. Here are tips on how to improve your credit score:
Don’t max out
Credit cards and other financial products have limits. Don’t use all of the credit available as this can be a sign of reckless spending and inability to manage finances. Instead, aim not go over 70% of your limit – this will lead to an improved score.
Keep Utilization low
You should try not to let your credit utilization (your credit balance in relation to credit limits) build up towards the payment due dates. Instead, keep your credit utilization low throughout the month by making multiple, smaller-sized payments.
Check for errors
You need to regularly check your (free) credit report, identify any errors, dispute them and get the bureaus to investigate and hopefully remove these errors. All South African citizens are entitled to one free report per year from a credit bureau. TransUnion, Compuscan, Experian and XDS, CPB and VeriCred are the primary bureaus. Alternatively, ClearScore can give you a free report too.
Ask your credit provider for higher limits
By consulting your credit card issuer, you can check if they are willing to increase your limit. If your limit increases and you continue to only utilize the same amount as before, you won’t reach the new limit. Just a simple call can lead to an improved credit score.
Don’t close your credit cards
Contrary to intuition, closing your credit card may negatively affect your credit score. Instead keep it open and use it conservatively because with this credit card being active, it allows you to have a higher total limit. This means the total credit utilized in terms of all cards will be lower.
Pay bills on time
Nothing gives a better indication of one’s ability to pay than their actual payment history. A missed payment has a significant impact. If you have too many payments, draw up a budget using 22seven, prioritize payments and try to reduce unnecessary spending.
If you are young or have limited credit history, you can ask a close individual in your life to add you to their card as an authorized user. Make sure they have a lengthy and strong credit record. This person doesn’t even need to let you use the card or know the account details. This will help you build up a better credit report and improve your score.