Low Credit Score?

How Does a Low Credit Score Affect Your Borrowing?

You may have heard banks or other financial institutions talking about a credit score, and whether it’s high or low. But what exactly does this mean, and how does it affect your lending potential? Unfortunately, many consumers are in the dark when it comes to their credit score, and don’t realise that a low score can negatively impact their ability to apply for credit.

What exactly is a credit score?

When you apply for credit of any kind, a credit check is done to determine what your score is. Based on this, lenders can determine what they can expect if they loan you money. I.e. will you pay them back on time, how often is your credit card maxed out, etc. The higher your credit score, the less risk there is to the lender. So it goes without saying that you want to build and maintain a healthy credit record. This is especially true when it comes to purchasing a home or vehicle.

How is a credit score calculated?

This is done by using information contained on your credit report, including account information, payment history, and public records and enquiries (requests from other credit providers to view your credit record.) Your score is a summary of positive and negative factors that determines whether or not you’re likely to honour future credit agreements.

What can I do to increase my credit score?

The good news is, if you have a low credit score there’s a lot you can do to increase it, and it doesn’t take long to reflect.

  1. Always pay your bills on time
  2. Always pay the full amount that is owed each month on your account
  3. Make sure you live within your means when purchasing on credit. I.e. if you make a purchase for R 20 000, can you afford the minimum monthly repayment?
  4. As a general rule, don’t use more than 30% of your credit available to you.  Using more than this could signal to credit agencies that you’re struggling financially - and in turn, will lower your credit score.

Remember, at the end of the day your credit score is your responsibility, so check your report at least twice a year to make sure there aren’t any errors or signs of identity theft. With basic precautions such as this in place, you can build and maintain a good credit record.