How to Raise Your Credit Scores
Credit and debt are a familiar topic for many South Africans. Believe it or not, recent studies show that South Africans are spending up to 75% of their take-home pay on debt.
Fortunately, there are ways to improve your credit score and get out of debt. Let's talk about how to raise your credit score as quickly as possible!
Credit Score Factors
Before we discuss how to improve your credit, it's important to understand how credit works. These are the most important factors that impact your credit score.
Payment History
Your payment history accounts for 35% of your total score, making this the most important factor on your credit score. Paying on time every month is essential to increase credit scores and get out of debt, but you especially don't want to go over 30 days.
If your payment is 30 days late, your lender will likely report it to the credit bureau. Even one late payment could drop a score by 100 points or more, and it will only get worse after 60 days and 90 days.
Moreover, this doesn't simply involve paying for your car loan and credit card payments. Any time you agree on payment terms and don't meet the agreed-upon terms, you can find a penalty on your credit score. Failure to pay utility bills, medical bills, or other payments may result in a poor credit score.
Credit Utilization
Accounting for 30% of your score, credit utilization is measured by the portion of your total credit limit you use. On your credit card (and other revolving lines), you will have a total credit limit. Ideally, you want to leave your balance under 20% of that total every month.
If you keep it under 50%, you shouldn't see any damage to your score. However, keeping your score under 20%, and especially under 10%, will actively help your score. The good news is that this typically doesn't last long on your score unless a high balance is a recurring pattern.
For example, the average credit card debt in South Africa is 18,800R. That's perfectly fine if your credit limit is 100,000R, but it could be disastrous if your limit is 30,000R.
It's okay to spend more than a certain percentage of the balance in one month, as long as you pay it down before your statement. This is an important metric for your score, so pay attention to these thresholds.
Age of Credit
How long have you had your credit lines open? This is an important metric on your score, accounting for 15% of the total score. However, there isn't much you can do about it except for waiting.
We recommend keeping your credit cards open and in good standing for as long as possible. Installment loans come with fixed terms, so they can only help to a certain degree. You can keep credit cards open indefinitely, which will help boost your score over time.
Credit Mix and New Credit
Each of these accounts for 10% of your credit score, but they can still make a substantial impact. Credit mix refers to your mix of installment and revolving lines of credit. Installment loans are car payments, mortgages, and other fixed-term loans.
Revolving lines of credit include credit cards, HELOCs, and other lines that change over time. Having a healthy mix of the two shows creditors that you can handle multiple types of debt at once, which can improve your score. If you have installment loans but no revolving lines, consider opening a credit card!
Conversely, new credit is measured by the number of hard inquiries there are into your credit report. The more you have, the more it can lower your score, but don't worry. This metric will only last for a maximum of two years, and a limited number of inquiries should only last for a couple of months.
What Is a Good Credit Score?
Your credit score falls between 300 and 850, with 300 being the worst possible score and 850 being the best. Don't worry about getting an 850 score, as it's virtually impossible. Instead, focus on keeping your score above 680, and preferably above 720.
680 and above is considered a good credit score, but some creditors prefer scores above 700. 720 is a great score to aim for because scores change by small amounts frequently. One or two hard inquiries when searching for an apartment could drop your score by 5 to 10 points temporarily, so it's best to maintain a "buffer."
Ideally, you want to get above 750 or 760 in the long term. These are considered excellent scores. You will find the lowest interest rates and highest acceptance rates with scores above this mark.
A bad credit score is typically anything under 550, but some creditors will not accept applicants below 580. The average credit score in South Africa is between 583 and 619.
How to Raise Your Credit Score
Whether you have a good or bad credit score, you should still focus on improving your score over time. First, it's important to set the right expectations. Credit score changes don't happen overnight.
If you're planning to buy a home or taking out a new loan in the next few years, the best time to start is now. Give yourself at least a year, and you should see substantial changes with the right habits.
However, it also depends on your current credit report. If you have missed payments on your credit, bankruptcies, or anything else, then it may be more challenging to climb. Regardless, here's how to increase your credit score as soon as possible.
Know Where You Stand
It's important to know your current credit situation if you want to improve it. You don't need a hard inquiry into your credit report for this. You can use a free credit reporting tool to help you understand, but keep in mind that they aren't 100% accurate.
They may have missing information, but they will still give you a fair idea of where your credit stands and what needs improvement. From there, it's important to look at your current debts to see what you owe.
Make a Plan to Get Out of Debt
If you have outstanding debt, paying it down is the best thing you can do. If it's from credit cards or payday loans, high interest rates can trap you in a dangerous debt trap. By making the minimum payment each month with 200,000R of debt, you could see a 25% increase in your balance after only one year.
We know that paying down debt isn't easy. Debt can be overwhelming and turn into an endless cycle of borrowing. If you need assistance, you can always use debt counselling to help you pay down your debts.
Stay Consistent
Consistency with payments, credit utilization, and other financial habits is essential for a good score in the long term. Whatever your plan is to get out of debt, keep it as consistent as possible for the long run.
If automating payments makes it easier for you, try that! Making payments on time every month is the most important part of improving your credit score. Even if it's the minimum payment, pay on time, every time.
Reduce Credit Utilization
Try to keep your credit card utilization under 20% as soon as possible. If it's already higher, it may make more sense to take out a personal loan and make installment payments than to keep your balance so high. Most often, credit cards come with higher rates, and the high utilization will harm your score.
Open New Accounts Wisely
If you decide to open new credit lines, be careful. The more hard inquiries into your credit report, the more it will harm your score. Do your research on loans you want to open before applying and try to narrow your search as much as possible.
Clear Your Credit
Finally, if you need to get out of debt or if you have a poor credit score, there is help available to you. Sometimes, it's best to start from scratch and build your credit from the ground up. For that, you will need the help of credit clearance services.
Improve Your Credit Score Today
Now that you know how to raise your credit score, put these tips to use today for the best results. A poor credit score can lower your mobility in life, so it's important to build good credit over time. Just take small steps consistently and remember to reach out for help when you need it!
Keep reading our blog for our latest financial tips, and don't hesitate to contact us with any questions or for help with your credit needs!