Tristan Powys (Credit Manager) @ Lucid Living
Until recently, a credit score of 680 was something to be proud of. It meant you paid most of your bills on time, and had a solid enough record to get a loan at relatively good rates (according to South African norms).
Not anymore. That credit score is firmly second-tier these days. Now, borrowers need at least a credit score of 720 to get the biggest loans or the best terms. For millions of once-desirable consumers with credit scores between 680 and 720, that 40-point jump could cost thousands of Rands over the life of a typical loan.
Once that line has been drawn, there’s no wiggle room, either. Lenders place borrowers into brackets, which mean someone with a credit score of 719 is lumped into a bracket that starts as low as 690. That one measly point could cost more than R4,000 over the life of an average 36-month car loan, or R18,000 over the life of a 15-year home loan
For their part, lenders say the credit scores aren’t arbitrary and that a credit score of 720 predicts the borrowers who are most likely to repay their debts and least likely to default. At the same time, they’re more profitable than people with very highcredit scores ranging from 850 upward, because they’re also likely to carry a balance or incur fees – and therefore, to generate profit for the lender.
Having witnessed the effects of the sub-prime catastrophe, you will appreciate that South Africa is inextricably linked to the global economy and thus heavily impacted by market conditions in the US and elsewhere. So a 680 credit score, has become a casualty of the market crash.
When Fannie Mae and Freddie Mac were backing mortgages after the crash, they settled on the 720 credit score threshold for the best pricing, says Keith Gumbinger, a vice president at HSH Associates, a mortgage-data tracking firm. At the time, most borrowers were afraid of lending to anyone, so 720 credit score seemed plenty low. Because most mortgages are backed by Fannie or Freddie, the major lenders kept the same threshold, and as banks have started to put loans on their books again, it’s stuck.
Of course, while earning a 680 credit score wasn’t all that difficult before the recession, the new good-credit bar of 720 is harder to reach. With more people out of work and unable to pay their bills, even consumers with previously envious credit scores might not reach the 720 credit score.
To get there, a consumer would need low balances on credit cards and a 15-year credit history — but might have missed a couple payments over the last two years. Someone who regularly pays on time could drop from the mid-700s if he applied for several new credit facilities recently. Other 720-scorers: Those who haven’t missed a payment but carry balances that are more than 30% of their credit line; or those who have a short credit history but pay on time.
For someone on the cusp, the differences could be as small as one extra credit inquiry – like when an insurer looks up your credit score before approving you application for insurance, or if a prospective employer pulls your credit score without telling the credit bureaus it’s strictly for employment reasons. The same thing could happen if you’re suddenly using more of your available credit because you made a big purchase.
What’s a 680 credit score to do? Assuming the information on your credit report is accurate, not much beyond the regular steps to credit score maintenance, experts say. That means paying bills on time and keeping debts to a reasonable level.
According to statistics reported by the Credit Ombud, almost 70% of disputes (challenging the accuracy of information) investigated were resolved in favor of the consumer. Put another way, almost 70% of credit reports have incorrect information. An incorrect adverse listing or wrongly matched judgment will have a devastating impact on your credit score.
Speak to a LUCID Living Credit Manager on (T) 0101590 5617, to get expert advice on how to quickly boost your credit score.