Understanding Your Credit Score_Part 2

Adv Kate Thambiran @ Lucid Living

Part 1 should have convinced you, of the importance of your credit score on your personal financial affairs. If not, allow me to reinforce the point: a good credit score saves you money, while a bad credit score makes credit expensive and scarce.

Nobel Laureate Muhammad Yunus (Grameen Bank) declared: “credit has the power to change lives. Across the Globe, people can attest to this.” Another irrefutable truth is that access to credit, is inextricably linked to your credit score.

Improving your credit score, should rank high amongst your financial goals. You have the power to improve it and reap the benefits. Here are some great tips on how to do it.

35% of your score is based on how well you pay your accounts.

• Pay your accounts on time. The number of non-payments or late payments, the value of the arrears and the recentcy of the non-payment will determine how dramatically your credit score is lowered.

• If you have missed payments, get current and stay current.

• Pay more than the minimum monthly payment. An increased amount of 5-10% is significant enough to improve your credit score.

• If you are having trouble meeting your monthly repayments, contact your creditors or a Lucid debt counsellor. By negotiating lower instalments, you can consistently meet the payments and prevent your credit score from nose-diving.

Great Cheat: Make 2-3 payments a month (split the minimum instalment + 5-10% extra into 2 or 3 payments), each payment made 10 days apart from the others. When you make a payment higher than your minimum payment and increase the frequency of payments, you trigger positive action on your credit score.

30% of your score is a measure of how much credit you have available to you and how much of that credit you’re using.

• Try not to use more than 20-30% of the credit available to you on any revolving facility. You can achieve this by paying down debt, paying particular attention to the facilities that have the highest utilization (credit balance/credit limit, expressed as a percentage). In the US, consumers with the highest credit scores have an average utilization of just 7%.

• Keep balances low on credit cards, store cards and other “revolving credit”. The single fastest way to improve and maintain your credit score is to get out and stay out of revolving credit debt.

Obtain a copy of your credit report and study it for any errors or outdated information. Correcting errors can have a dramatic impact on your credit score. 72% of consumer disputes lodged with credit bureau confirmed that the information was inaccurate.

Great Cheat: If you’re a “good” customer, a fast way to bring that utilization percentage down is to ask for an increased limit.

15% is a measure of the length of your credit relationships.

• If and when you decide to cancel a credit facility, try not to cancel the ones you’ve had the longest.

• If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a negative effect on your credit score if you don’t have a lot of other credit information. Also, rapid account build-up can look risky if you are a new credit user.

Great Cheat: If your spouse has an existing credit card or revolving credit account in good standing, add your name as an authorized user of that account. As an authorized user, you’ll garner all the good credit history of that account, the same as if you’d been on the account since it was opened. This can give a tremendous boost to your credit score.

10% is based on your search for new credit. How recently have you enquired about opening new accounts?

• Every enquiry into your credit score has a negative impact, so be conservative when you apply for credit.

• This does not mean that you should not look for the most competitive credit offer, however do your rate shopping for a given loan within a focused period of time. Generally, all enquiries for the same facility (e.g. vehicle finance) within a 15 day period are considered 1 enquiry.

• Note that checking your own credit report won’t affect your credit score, as long as you order your credit report directly from an authorized reseller – like Lucid.

Great Tip: Under the National Credit Act, other than applications for credit, you must consent to a third party making an enquiry on your credit report. Look for unauthorised enquiries on your credit report and get the credit bureau to remove these immediately.

10% is the composition of your file. The variety of credit facilities.

• In the world of credit scoring, balance is important. The best credit scores have a “spread” of credit facilities (e.g. home loan, vehicle finance; credit cards, store cards etc.).

• Revolving credit facilities (e.g. credit and store cards, overdraft facilities etc.) are given a higher weighting, because they require strong discipline.

• Don’t obsess over this component. It’s the hardest element to control and represents a relatively small portion of your credit score.

Great Tip: Do not rush out and open new accounts or close existing ones just to get the right “mix”. Both these actions will probably have a negative effect on your credit score. Build your credit history over time, paying attention to all these factors.