Tristan Powys (Credit Manager) At Lucid Living
“Regard your good name as the richest jewel you can possibly be possessed of. The way to gain a good reputation is to endeavour to be what you desire to appear.” Socrates (Greek philosopher; 469 BCE – 399 BCE).
It’s hard to build, yet easy to destroy. It follows you wherever you go and affords you the benefit of the doubt. Your good name is priceless.
Your credit record is your financial ‘good name’. It’s your reputation in the eyes of credit and other service providers and it’s one of the most important considerations when deciding if they should lend you money.
Your credit score is an attempt to quantify how much risk a lender is taking on by loaning you money. A credit provider will look to your credit score to determine if you are ‘credit worthy‘ – the better your credit score the more likely they’ll grant you a loan. In addition to making loan applications easier, a good credit score is also a great bargaining tool when you’re negotiating for a lower interest rate.
There are 11 registered credit bureaus and these all-seeing, all-knowing credit bureaus adjust your credit score each time you borrow or repay debt. Credit providers choose which credit bureau to use and each one has different information about you, meaning that you have up to 11 credit scores. It’s also possible for lenders to produce a unique credit score for you using their own records.
Of late, banks and other credit providers seem terrified of lending so it’s a good idea to work on your credit score before applying for a mortgage, vehicle or other loan.
Here is some advice on how you can improve your credit score:
1. Pay on time
Paying on time is, obviously, a vital determinant of your credit score. In fact, your payment history can contribute up to 35 percent of your credit score.
Each time you’re late, even by a day, it gets noted and your credit score decreases. To ensure this never happens I suggest you set up debit orders or postdate payments you make online.
Recent transactions carry more weight than older ones, so it’s fairly easy to erase earlier blots if you consistently start making timely payments.
Remember, it doesn’t matter that you can pay; you must pay on time.
2. Pay your credit cards off
Nothing shows you can handle being in debt more than regularly making payments on your credit cards and keeping their balances down.
3. Don’t end up in court for paying late
It’s fairly easy to negate the damage of a late payment by simply being on time with all subsequent ones. If, however, you end up in court your credit record will be irreparable for many years.
4. Don’t take on too much debt
Try to have only one, but no more than two credit cards and no more than two major debts (e.g. a home or car loan).
Never max out your credit cards and try to keep the outstanding balance below half of your credit limit. The lower your balance in relation to your credit limit, the better it is for your credit score.
Avoid taking on more credit while you are paying off other debts.
Aim to cut what you spend on debt each month to less than 30 percent of your after-tax income.
5. The devil is in the debt ratio
Your debt ratio is the difference between what you owe and your credit limit and can make up 30 percent of your credit score. Creditors like that gap to be gaping and it will be detrimental to your credit rating if you, for example, owe R14 500 with a limit of R15 000.
If you’re planning to apply for a big loan, first pay off all balances that are close to their limit. Don’t submit your application until all outstanding balances are less than 50 percent of their respective limits.
Never ask your creditors to lower your limits as this will instantly reduce that all important gap between your balances and the credit available to you.
When paying off debt it’s cheaper to tackle those with the highest interest rates first. However, when you’re trying to improve your credit record it’s best to first pay debts that are the closest to their maximum limits.