Here's how to use your credit to improve your credit score
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South Africans spend about 75% of their take-home pay on settling debt – and yet almost half of them still struggle to meet their repayment commitments. These figures from a 2020 South African Reserve Bank report paint a foreboding picture. But not all debt is bad. There are ways to positively manage debt to build a strong credit score which, in turn, can be life-changing.
Ayanda Ndimande, Strategic Business Development Manager: Retail Credit at Sanlam, says, “Credit can empower us to realise a goal – like purchasing a home, pursuing tertiary education, or starting a business. To get credit for these things, you need a good credit score. To build a good credit score, you need a strong credit history, and you can influence this by taking simple steps to positively manage your debt.”
Managing credit takes time and deliberateness. In the current financial climate, many have had to default on existing debt obligations. Ndimande adds, “South Africans’ real incomes have shrunk by 21% in five years, according to DebtBusters. Currently, South African consumer debt has risen to 1.9 trillion with 20.4 billion in value defaulted over January to March this year. Defaulting on debt has a negative impact on one’s credit score. This has profound consequences should one wish to apply for a home loan, vehicle financing, and other kinds of credit down the line.”
Your credit score
A credit score is calculated from a person’s credit history and considers the following (FICO model):
- Payment history: approximate weighting of score: 35%
- Amount owed: 30%
- Length of credit (considers your oldest account, newest account, and average age of all your accounts): 15%
- Credit mix (the different types of credit accounts you have): 10%
New credit (opening lots of new accounts in short space of time makes you riskier): 10%
Ndimande says, “Managing your credit starts with knowing your credit score.
“Once you know your credit score, you may be in the position to negotiate for better interest rates, if your score is strong. If your score is not where it needs to be, it’s wise to act fast to turn this around.”
How to improve a credit score
Things that negatively influence a credit score include paying debt late, maximising the credit facility, and taking on a lot of debt in a short space of time.
Once you know your credit score, here are some small steps to improve it:
- Always pay your debts on time
- Consider your credit utilisation ratio. This is the amount of revolving credit you’re currently using, divided by the total amount of revolving credit you have available. Ideally your credit utilisation ratio should be closer to 30% and for a really great credit score, it should be around 10%.
- Know your affordability and only take out credit you need and can afford to pay back
- Negotiate with creditors on premiums and ensure you keep to these arrangements and pay the agreed amount, on time
If you’re just beginning your credit journey, consider starting small, with a cellphone contract, for example, or a credit card. Ask the bank to cap the credit card amount at a figure that suits you – not necessarily on what you qualify for.
If you’re finding there’s ‘more month at the end of your money’, personal finance author Mapalo Makhu stresses that payday loans are not the answer. In her recent video, she suggests prioritising an emergency fund and bulking up income by asking for a raise at work, starting a side hustle or simply reworking a budget to cut unnecessary expenses.
Ndimande concludes, “Yes, you can use your existing debt to improve your credit score, if you commit to paying it off on time and keep a close eye on your utilisation ratio. Before taking on more debt, ask yourself what it will help you achieve. Is it going to manifest in positive, constructive ways?