Remind me – what is a credit score?
A credit score is a calculation of how ‘credit worthy’ you are when you apply for a loan, bond, or any other form of finance. Found in your credit report, your credit score is an indication lenders will use to understand how much money they can lend you, and how much you could afford to repay, over a certain amount of time.
Your credit score is calculated on many different factors found within your credit report. For example, your credit score is usually calculated on an evaluation of your past payment history, whether you’ve applied for credit before, as well as other public records and enquiries made on your account.
It’s important to remember that different credit score companies/bureaus will calculate your credit score differently – some may offer a maximum score of 700, while others may have a maximum value of 1000. Do not be alarmed if you find that your credit score differs sizeably across different bureaus, as their credit score formula may differ or the minimum and maximum credit values they use could be different.
I’m not in debt and I have savings – why is my credit score low?
It’s notable that your credit report is an overview of your borrowing history; that means that your credit report will only include loan queries, applications, repayments, and judgements made against your name. Your credit score will not include reference to your own bank account or any investments in your name (other than if you have financed the purchase of a property through a bond).
This means that should you have surplus income at the end of the month, a healthy savings account, or a number of different profit-producing investments, your credit score can still be low if you have not previously applied for a form of credit. This is why it’s sometimes said that taking out a loan and repaying it timeously can often increase your credit score.
Having a low credit score may not necessarily see you declined for credit outright. In many cases, reputable lenders will ask to see that you have a regular income and that you have sufficient income to cover the repayments on your chosen loan amount and term. If you have surplus income, have no judgements in your name, and don’t often find yourself short of money, this can influence a lender’s decision to give you access to credit even if your credit score is low.
How do loan applications influence my credit score?
When you begin the application process for a loan or bond, you might be invited to see whether you ‘pre-qualify’ – where you’ll be asked for your ID number and an estimate of your income and expenses. It’s noteworthy that a pre-qualification does not equal a successful application – in these instances, a lender might simply be giving an indication of the loan amount or term you might qualify for.
If you undertake the qualification process, a lender will request your credit report from a bureau. This is called a ‘soft pull’ (in other words, a preliminary check) that will not affect your credit score.
When you formally apply for a loan with a licensed credit provider, the lender in question will request your credit report from a credit bureau. This process, called a ‘hard pull’, will leave a ‘footprint’ on your credit score, which is a signal to other credit providers that you are actively applying and seeking a loan. If you make many applications in a short space of time, you may find your credit score decrease as a signal that you may be having problems managing your cash flow.
When you apply and successfully borrow money from a lender, your credit score will usually decrease as a sign to other lenders that you are making continual repayments to your chosen credit provider. Should you fall behind on a repayment on an instalment loan, your credit score can decrease further.
Once you have successfully repaid your loan in full, your credit score can increase. This signifies that you are found to be more credit-worthy, as you have successfully qualified to borrow and repay your loan over time and are seen as a desirable customer to other credit providers.
Should you fail to make regular repayments on your loan or fall into arrears, your credit score will gradually decrease over time. Should you eventually fall into significant arrears, be handed over to a debt collector, or have a judgement rendered in your name, your credit score may decrease significantly.
What factors influence my credit score?
When you apply for a loan, your credit score will be the result of a mix of factors, and it is important to remember that different credit bureaus calculate their scores differently, and with different minimum and maximum values.
Your credit score is usually comprised of your bill payment history, which will include payment issues such as charge-offs, collections, bankruptcy, repossession, or past foreclosure. Also included is your level of debt – for example, your credit score will contain a calculation on the amount of debt you presently have registered in your name. This can include the ratio of your credit card balance to your credit limit, or the ratio of your loan balance to your original loan amount.
The age of the debt on record will also influence your credit score – in the event you are still repaying a loan that you borrowed long after you initially promised to repay, your credit score can decrease significantly.
Does checking my score have a negative impact on my credit report?
Fortunately, no! As outlined in the National Credit Act, all South Africans can check their credit score once for free every year and can pay to access their records thereafter. Checking your credit score does not influence the result of your score, or the content of your report, in any way.
Many new services will allow you to check your credit score for free at more regular intervals. This can be a great way of maintaining a healthy score and keeping abreast of what items are in your credit report. At least once a year, you should ensure to check your report to identify whether any credit products have been taken on your behalf or whether an item has been mistakenly added to your credit report.
Where do I get my credit score?
If you’re ready to read your credit report, you are entitled to view it once per year, for free, from any credit bureau such as TransUnion or Experian. However, services such as ClearScore will enable you to receive a monthly report that is continuously updated with your latest credit history for free.