How to establish and build up a good credit score

Meet Themba, a 23-year old graduate who has just landed a permanent job as a graphic designer with an ad agency. Themba is looking to buy his first car which will make travelling to work a lot easier than the current 90-minute commute. Themba prides himself on paying cash for everything he has and has always been disciplined about saving the income he made from his gig design work while studying. Exciting right!

But it’s right about here that Themba hits a brick wall - even as a now gainfully employed person, he has no history of managing any credit, not even a cell phone contract, and therefore has no credit score. His application for vehicle finance is declined – with a non-existent credit score and credit history, the banks have no track record to base their risk assessment on as to whether he is a good payer or not.

How do I establish and build up my credit score if no one will give me credit?

It’s important to start building up a credit record as soon as you can so that down the line, you can apply for loans or credit for those big-ticket life essentials – like a home, car, furniture and so on. It takes several months to build up sufficient payment history in order to generate a credit score, so start the process long before you actually need the credit.

Tej Desai, Chief Executive Officer of Alefbet Collections & Recoveries, a group of collections firms which includes Shapiro Shaik Defries and Associations, Metro Revenue Collect and ITC Business Administrators, explains that it takes around 12-18 months to build up a meaningful credit record, and you’ll need some sort of retail or store credit account, or even a bank account with a debit card – to set this process in motion.

“Get started with a very manageable, interest-free small credit facility that you can easily afford, and instead of paying cash, purchase something using this facility. A cell phone contract or retail store account are good options. Make sure that you make all your instalment repayments on time, every month and pay the minimum required amount or more each time. The proviso is that you must be able to afford the repayments and that you pay consistently – the objective is to demonstrate your maturity and responsibility when it comes to managing your credit accounts,” explains Tej.

What is a credit score?

A credit score is used by credit providers to determine whether you qualify for credit. Your credit score is based on your credit report which is based on your history of how well you manage your debt and how responsible you are when it comes to repayments, including whether you consistently pay on time and pay at least the minimum instalment due. Credit providers use your credit score to determine what kind of borrower you are and the level of risk you present in terms of repaying a loan or credit - which is why maintaining a good credit score is so vital.  Remember though, credit providers will also look at it alongside other factors such as salary/income and existing debt levels to determine affordability before deciding whether to provide you with credit.

Who calculates your credit score?

Your credit score is calculated by a credit bureau using all the details on your credit profile, with your score reflecting a summary of all your financial decisions and behaviours as you start transacting with various banks, credit providers, retailers and so on.  Credit bureaus are sent this information by lenders about the credit you have and how you manage it. Court judgments against you or whether you are in debt review also forms part of your credit report.

Why is it important to build up your credit score?

While ‘cash is king’ for consumption type purchases, there are many big-ticket items that very few people can afford to buy on a cash basis – a house, car, large appliances, tertiary education and so on.  Most people will need a credit facility to be able to afford these purchases. Your credit score and past credit behaviour plays a fundamental role in being able to qualify for such loans and will also define the terms and interest rates you qualify for – the better your credit score - which means a lower risk profile to the lender - the better the terms and interest rates you can expect to receive,” explains Tej.

What’s a good credit score?

Credit scores are typically rated on a scale from 0-999 as follows:

• 767 – 999:  Excellent
• 681 – 766:  Good
• 614 – 680:  Favourable
• 583 – 613:  Average
• 527 – 582:  Below average
• 487 – 526:  Unfavourable
• 0 – 486:  Poor
•  

What factors influence your credit score?

• Missing or late payments will negatively affect your credit score. Even if you double up on the instalments in the following month to catch up, the inconsistent payments will be reflected.  The same applies to ‘adverse legal information’ – although this information is cleared as soon as the account is settled, the negative repayment history stays on your profile for a few years.
• Multiple credit enquiries and high credit utilisation – a sudden uptick in credit applications in a short period will red flag on your credit profile, as will a consistently high credit limit utilisation.  Try and keep your usage to less than 50% and ideally at 35% of your credit limit.  Any credit enquiries (applications for credit) will reflect on your credit file for up to two years.
• If you have a number of unused credit facilities, consider closing some of them. Having a lot of available credit could lead to a large debt balance if you decide to use all of them at once.
• A court judgment or ‘blacklisting’ will negatively impact your score.
• Duration of credit history – It usually takes a minimum of six months to generate your first credit score, while establishing a good or excellent credit score will take a few years of disciplined credit behaviour. By the same token, it also means that any missed or late payments history will stick around for years too!
• If you run into payment difficulties, be proactive and make arrangements with the credit provider. Your debt is not going to go away so proactively approach and negotiate with creditors and lenders. If contacted by a collection’s agent, explain your situation so they can work with you to find a solution or make alternative payment arrangements where appropriate.  But don’t ignore the calls. A lack of any response from you will simply see the matter move into the legal stage and this becomes much more challenging to resolve,  negatively impacts your credit rating and future personal financial health. If you’re in a genuine financial bind, consider a debt consolidation process where professionals can help and negotiate on your behalf and ensure that you rehabilitate yourself and avoid a legal process.  (Visit the NCR’s website for a list of registered debt counsellors - https://www.ncr.org.za/register_of_registrants/registered_dc.php )
• Regularly check your credit report via the various credit bureaus which provide a free annual credit report to consumers. The big 4 credit bureaus in South Africa are TransUnion, Experian, XDS and VeriCred. Check that all details are indeed correct – many instances of identity theft and fraud are detected this way and doing so can prevent a severe adverse impact on your credit score and financial health.  If your identity or passport documents are lost or stolen, report this to the SA Fraud Prevention Services which will enter your details on its database to inform its members that your identity has been compromised and that they should take additional care when confirming your identity, including credit providers.
• Improvements in your credit score will usually start showing within three months of consistent behaviour and your score should updated accordingly. However, there’s really no fixed time frame for this and it is usually driven by the time it takes for you to reflect disciplined credit habits and to reduce your debt burden and utilisation to healthier levels.
• Serious credit impairments such as late payments, default judgements, insolvency and legal action can stay on your credit record for up to 10 years.