How to improve your credit score rating [Update]

Coping with financial stress and consequences isn’t easy, making debt management a difficult juggling act. However, it should be a priority, which is why we’ve put together a guide to help you improve your credit rating.

Buying a car can be tough when you’ve been blacklisted, that’s why we’ve put together this handy guide to help you keep your credit record clean.

We know that keeping up with payments may be hard and overwhelming at times, but the onus is on you as the debtor to manage your finances and avoid being blacklisted. 

All banks, and most commercial enterprises, have plans in place to help people through times of crisis, but many South Africans are faced with the nightmare of trying to get finance once they’ve been blacklisted, or have outstanding judgements or defaults listed against their names. Bad credit can lead to steep interest rates, large down payments or, in worst-case scenarios, your finance application could be declined.

As a general rule, it’s a good idea to check your credit score regularly. The National Credit Act 34 of 2005 entitles you to a free credit report annually. We recommend using this service so that you stay up-to-date on your financial standing.

Some institutions that offer this service include:

• Experian
• Transunion
• Credit Bureau
• My Credit Status
• ClearScore

WHAT IS A CREDIT SCORE RATING?

A credit score is a three-digit number. 

According to TransUnion, “Your Credit Bureau score is calculated using a formula that evaluates how well or badly you pay your bills, how much debt you carry and how all of that stacks up against other borrowers. In effect, it tells you in a single number what your credit report says about your management of existing credit.”

Sebastien Alexanderson, CEO of National Debt Advisors, explains that your credit score, “is based on the payment history on your credit cards, personal loans and retail store cards. Your score also takes into account how much revolving credit you regularly use, the types of accounts you have, how long you have had certain accounts and cards and how often you apply for credit.”

TIPS TO HELP YOU KEEP YOUR CREDIT RECORD CLEAN:

• Go through your credit report with a fine-toothed comb
  Discrepancies can and do happen. Make sure that all the accounts listed under your name do in fact belong to you and that details (like your ID number) are listed correctly. If you find a mistake, try to obtain a copy of your report from at least two other agencies. Compare all reports to determine whether the error exists on all of them. If it does, you’ll need to dispute this with the credit bureau to clear your name. Remember to keep following up until your report is correct.

• Keep track of your credit score 
  Knowing where you stand credit-wise is the best way to avoid a pile-up of problems. Identifying issues as they start, or even before they start, will save you time, money, and stress.  

• Make sure all medical bills are paid in full
  Unpaid medical bills are one of the leading causes of negative credit records. This is because patients rely on medical aid schemes to cover their costs and are often unaware of outstanding amounts until they receive a legal letter.

• Don’t open multiple accounts in close succession
  Opening several accounts in the same month or in a short period of time could flag you as a high-risk debtor.

• Only open an account if you know you can afford the repayments
  Do a budgeting exercise each month to ensure that you know what you can afford to spend before making any purchases on credit. Your credit repayments should never exceed 30% of your monthly income. Aim to keep your credit repayments below 20% of your monthly income.

• Mix it up 
  Having a variety of credit types is better than only having one type of credit. This includes loans with fixed monthly payments, revolving credit, and credit you can charge up (like on a credit card).

• If you suddenly find yourself in financial trouble, alert your creditors
  You’re unable to predict unfortunate circumstances like retrenchments or illness, and your creditors are aware of this. If you do find yourself in unfortunate circumstances, contact your creditors immediately. Your creditors don’t gain anything by having to blacklist you and are usually willing to negotiate new payment terms that allow you to honour your debt. Make sure that all new agreements are documented in writing, and ensure that you don’t default on the new repayment plan.

• If you’ve run into financial trouble, don’t run up any more debt!
  Make sure you pay off everything you already owe before taking out any further loans. You may find yourself in a situation where debt is mounting faster than you can repay it, and a debt consolidation loan can be a good solution. This strategy involves paying off your smaller debts with a single loan that has a longer repayment period. With lower monthly instalments, you can more easily make your repayments, thus avoiding late payment charges and preventing any further damage to your credit score. 

• Protect your personal information 
  Identity theft can ruin your credit score and be very difficult to rectify. Keep your data safe by using unique passwords, only making financial transactions using secure wifi connections, and be weary of phishing scams.

• A small balance looks better than a zero balance
  This might sound counterproductive, but having a small outstanding balance on an account shows potential creditors that you’re able to manage your accounts responsibly.

• Don’t overextend yourself
  Whilst a small outstanding balance on an account can be helpful, having ten different accounts, all with outstanding balances, can raise a red flag to financial institutions. Try to limit yourself to just one or two accounts, and make sure you keep the balances as low as possible by making regular monthly payments.

• Don’t max out your credit card or overdraft limit
  If your credit card is constantly maxed out, you have overextended yourself.

• Late payments decrease your credit rating
  Pay your accounts on or before their due date. This will increase your credit rating and reflect positively on your credit history. This applies to all accounts, from retail accounts to credit cards, personal loans, bond repayments and car finance. Every overdue payment slowly lowers your credit score and will result in defaults, judgements, and ultimately blacklistings.

• Review your accounts constantly
  If you have any mismanaged accounts with overdue amounts on them, make sure that you re-establish regular, timely payments on these accounts. This will slowly start to build up your credit rating again.

• Don’t ignore legal letters
  Check your emails regularly when you know you’ve missed a payment. Many creditors will send you an email before taking legal action. 
  If you’ve received a legal letter from a creditor, address it immediately! This is extremely important. The mail backlog through the Post Office will likely continue for some time, so there’s a chance your letter may have been sent a fair amount of time before you received it. 

• Reach out to debt counsellors 
  When it feels like you’re drowning in debt, seeking professional help from a debt counsellor can make a world of difference. A debt counsellor can legally declare you over-indebted and negotiate with your creditors for lower interest rates and/or reduced monthly payments. The Debt Counsellors Association of South Africa is a database of debt counselling service providers. 

If you’re looking to buy a new car, use our finance calculator to get an idea of what your monthly instalments might be.