When you apply for a bond, one of the first things your bond originator or bank will do is check your credit score, that all-important indicator of the level of risk you represent to the lender.
A good score is the key to accessing all forms of credit – including car loans and store accounts as well as home loans – and is based on your history of payment on all previous and current accounts, as well as the percentage of your available credit already being used for repayments. It is a quick way for lenders to gauge your ability to repay your debts and manage your finances responsibly and is very widely used.
And yet most South Africans have no idea what their score actually is, or what factors could exert a positive or negative effect on it. The different credit bureaux in SA all have slightly different ways of calculating your credit score, but in general scores range from around 350 to 999, and what you should be aiming for is a score of 600 or more because at this level, you should not have any problem getting a loan, provided it is within your means to pay the monthly instalments.
If your score is above 650, you are more likely to be able to negotiate interest rate concessions, which in the case of a home loan can save you hundreds of rands a month – and many thousands of rands over the life of the loan.
This is why it can come as a big disappointment to find that your credit score is not as high as you thought it would be, especially when you’re diligent about always paying your bills on time. Fortunately, most of the reasons this could have happened are relatively easy to fix.
The common causes of low credit scores:
1. Too many companies have recently looked at your credit score
Of course it can pay to shop around when you’re looking for credit on favourable terms, but each time you request a quote, the lender will want to see your credit record, and if your requests are spread over more than few days, each inquiry will be logged separately and it will look like you are applying for several different loans or other forms of credit. The system will see this as a sign of a client potentially trying to get a lot of credit, quickly which is a sign of potential risk.
This is one of the reasons why you shouldn’t apply for car finance, for example, at the same time as you are trying to buy a home.
It is also why it is always better to apply for a home loan through a bond originator like De Mink Property Finance (who works in partnership with Mortgage Max): We only need to pull your credit report once before submitting your application to multiple lenders and ensuring that you get the most competitive interest rate.
2. The past coming into play
We often find, for example, that prospective borrowers have black marks on their credit records from years ago because they forgot to actually close an old bank account, for example, and the monthly fees have been mounting up unpaid. Or they may have changed address and missed a bill or two.
Alternatively, they may have had a debt judgment against them and paid it off, but not realized that they needed to advise the credit bureau and have it removed from their record. This is not an automatic process!
3. Wrong ID
Sometimes it is just a question of the credit bureau actually having the incorrect information, such as the wrong initials or the wrong ID number and penalizing the client for someone else’s bad payment record. This is why you should check your own credit record at least once a year.
4. Relying too much on credit each month
Your score will be lowered if you max out your credit card every month, even if you pay off the balance on time and in full before the due date.
What matters here is how much credit you have available and how much of it you’re using every month. This is your “credit utilization ratio” and you can reduce it by keeping the balances as low on possible on all your lines of credit.
Using up your entire credit card balance each month is logged by the systems as it could be an indication that you are not managing your finances properly, making you a potentially high risk borrower.
5. Not relying on credit at all
When we report back to a client that their Credit Score is low many will respond in the following way:
“Impossible: I don’t even have a credit card!”
Many people have been taught to save for what they want and never get into debt, but if you have no credit history, there’s nothing to show that you’re a responsible borrower who can manage balances and payments.
So it’s better to maintain at least one active account, like a phone, store or rent account, that you are careful to pay in full and on time every month. This provides evidence that you are responsible and are a low risk to the lender.
If your score is lower than expected for these 5 reasons De Mink Property Finance will be able to guide you toward a relatively simple resolution but it might take as long as 3 months for your score to improve.
That is why it is best to start any property purchase plans with a check into your credit score so that you can avoid frustrating delays when you are ready to buy!