NOT JUST A NUMBER: DETERMINES IF A BANK WILL GIVE A LOAN AND THE INTEREST CHARGED
By Ina Opperman
Does a good credit score really matter? The answer is yes, definitely. 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 it if there is a risk that you will not pay the money back.
According to Debt Rescue, 73% of South Africans run out of money early in the year and end up living on credit, setting the trend for perpetuating cycle of debt.
Over 4.1% struggle to make ends meet and use 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, chief executive of Debt Rescue.
“The Covid economic melt down, 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 says.
A good credit record is not negotiable, as it can help you reach your goals by potentially lowering costs for borrowing money.
- 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 paid on time each month.
Roets says store cards seem attractive but are addictive because they make it seem easy to buy now and pay later, but you will pay exorbitant interest rates.
It is also easier to put purchases on your card, especially when you have run out of cash.
Roets advises consumers to cultivate the habit of only buying on credit when 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 a house, that is wise, as these two items are assets. Borrowing to pay for a holiday 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 fuel price increases and electricity hikes, it is necessary to know exactly what is going on 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, at what interest rate.
Your risk as low, medium or high is a living number that fluctuates depending on your behaviour.
Why your credit score is important?
A good credit score is not something we think about 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, your interest rate, says Ester Ochse, product head: FNB money management.
“A credit score is a report card of how well you manage credit… Products such as credit cards, personal loans, home loans and retail store cards are forms of credit.”
Your credit status is usually shown as a number with credit bureaus and the higher the number, the better you have been. This score indicates the level of risk institutions will take if they extend your credit.
Factors that will negatively affect your credit score are:
- Late monthly payments
- Missed monthly applications
- Increasing credit usage
- A judgement for bad debt against you
What does a good credit score look like?
Ooba, a firm that helps people 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.
According to MortgageMarket.co.za, “the minimum credit score or a home loan 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 hundreds of thousands of rands if you buy a new home, as it enables you to negotiate a lower interest rate.
Every loan is negotiated on individual merits and “a home loan applicant’s credit bureau score is not the only factor that determines the interest rate”.
“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.”