A good credit score is really not negotiable, as it can help you reach your goals by potentially lowering costs for borrowing money.
We all need credit to buy a house or a car, and without a good credit score the bank will not even look at you.
The bank takes a risk when it lends you money and your credit score tells the bank if there is a risk that you will not pay the money back.
According to Debt Rescue, most South Africans (73%) run out of money early in the year and end up living on credit to get by, setting the trend for a perpetuating cycle of debt. In addition, over 41% of the country’s consumers currently experience tremendous financial pressure, struggle to make ends meet and live on credit to afford their debt and living expenses.
“The reality is that most South Africans spend 75% of their disposable income on debt and tend to take care of
living costs such as groceries with their store or credit cards, which just adds to the debt spiral,” says Neil Roets, CEO of Debt Rescue.
“The Covid-19 economic meltdown, along with rocketing fuel and electricity prices has pushed South Africans into a corner, where living on credit seems to be the only solution,’’ he cautions.
How to build a positive credit record
To increase your credit score, you can:
- ensure payments are made on time
- try to pay more than the minimum
- avoid applying too often, as each application can potentially affect your credit score
- ensure your service agreements, such as cell phones and insurance, are also paid on time each month.
Roets says store cards seem attractive but they are also addictive because they make it seem easy to buy now and pay later, but you will pay exorbitant interest rates later. It is also easier to put purchases on your card, especially when you have run out of cash.
Roets advises that you should cultivate the habit of only buying on credit when it is absolutely necessary.
Making good credit decisions
Not all credit is bad. “If you borrow money from a bank to finance your education or put a deposit down on your house, that is wise, as these two items are assets which will yield a return later on. If you borrow money to pay for a holiday, that is not a good idea. Although you will create incredible memories, you will be poorer for it.
Budget, budget, budget
Roets says this has never been more important. “With the impact of items such as fuel price increases and electricity hikes, it is necessary to know exactly what is going on in your personal finances and the best place to start is with a budget.”
This includes an understanding of your past repayment behaviour to enable the bank to assess how much credit you potentially qualify for and at what interest rate. Your risk as low, medium or high is a living number that fluctuates depending on your repayment behaviour.
Why is your credit score important?
A good credit score is not something we think about often, until we apply for credit. Your credit score and other factors affect whether you will get approved for credit, how much you can borrow and, most importantly, how low or high your interest rate will be, says Ester Ochse, product head: FNB Money Management.
“A credit score is basically a report card of how well you manage credit given to you by various financial institutions and retailers. Products such as credit cards, personal loans, home loans and retail store cards are forms of credit.”
Your credit status is usually shown in a number format on various credit bureaus and the higher the number, the better you have been at managing your current and past credit. This score indicates to financial institutions the level of risk they will take if they extend you credit.
A negative credit score
Factors that will negatively affect your credit score are:
- late monthly payments
- missed monthly payments
- frequently credit applications
- increasing credit usage
- a judgement for bad debt against you
- being declared bankrupt.
A positive credit score
“If you ever took out a loan, registered a bond, applied for a credit card or even a cell phone contract, you possibly have a credit score. Your score tells prospective lenders how much of a risk you are in terms of your past debt repayment behaviour,” says Ayanda Ndimande, head of Sanlam Business Development for retail credit.
What does a good credit score look like?
Ooba, a firm that helps South Africans secure home loans, grades credit scores using the following bands:
- 300 – 609 = Poor
- 610 – 649 = Fair
- 650 – 699 = Good
- 700 – 749 = Very Good
- 750 – 850 = Excellent
This scale varies slightly, depending on which credit union you use. According to MortgageMarket.co.za, “the minimum credit score for a home loan in South Africa is around 640. A score of 600+ will give you a fair chance of home loan approval, although this may vary according to the bank you use.”
If you have a good credit score, lenders will usually give you loans at the prime lending rate and it will not change unless the repo rate changes. Customers with very good and excellent credit scores may get prime -1% or -2% and customers with a poor credit record may get up to prime +3.
What does this mean?
Jackie Smith, head of Customer Contact Centre at Ooba, says a strong credit score could potentially save you hundreds of thousands of rands if you buy a new home, as it enables you to negotiate a lower interest rate.
The table below shows the impact of different interest rates using the example of a R1.5 million home loan, paid off over 20 years. An individual with a Prime +2% interest rate would pay an estimated R677 351 more than someone who secured a Prime -1% interest rate.
| Interest Rate | Instalment Amount | Total Repayments | Total Interest Payable |
| Prime -1.0% | R 11 405 | R 2 737 310 | R 1 237 310 |
| Prime | R 12 314 | R 2 955 415 | R 1 455 415 |
| Prime + 1.0% | R 13 256 | R 3 181 359 | R 1 681 359 |
| Prime + 2.0% | R 14 228 | R 3 414 661 | R 1 914 661 |
*These numbers are for illustrative purposes only; other costs may be included as well.
Every loan is negotiated on your individual merits and your credit score is not the only criteria that will affect your loan.
“A home loan applicant’s credit bureau score is not the only factor that determines the interest rate that the bank will charge. Factors such as the size of the home loan, the size of the deposit, the area that the property is situated in and your profession are some of the additional factors that influence the interest rate.”
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