5 ways to improve your credit score

credit score v2
The benefits of improving your credit score

When you pay cash for everything, your credit score becomes irrelevant.

The above quote from author Steven MacGee might be true, but paying cash for everything is the exclusive right of only a few who can avoid credit altogether.

The simple truth is - credit is needed to acquire it. The more credit anyone has, the better chance they have of securing credit elsewhere. The one important factor that will determine anyone’s success when applying for credit is how they finance the credit. However, credit-seekers do not necessarily have to carry a huge burden of debt to access credit. If people can pay high balances on revolving lines of credit such as on a credit card or home loan, they stand a chance of securing credit.

A good credit score means lower rates of interest 

What is a credit score?

Lenders use credit scores based on debt repayments, levels of debt, or applicants’ current account status to determine whether they will be in a position to pay for any credit applied for.

Investopedia.com says a credit score is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. When accounts are handled responsibly, customers get credit for it. This is how Investec. com rates the various scores

“Most credit bureaus rate your credit score between 300 and 850”:

  • A low score is generally considered to be between 300 and 579
  • A fair score is between 580 and 669
  • A good score is anything above 700

Here are some rules to follow to improve a credit score:

1. Credit card usage

Making payments regularly and responsibly on credit cards can quickly raise a credit score. Sometimes paying more than the monthly installment on such a card can boost scores. However, maintaining low usage of such facilities is also an advantage. Therefore, getting a credit card is one of the best ways of improving a credit score.

Payment history can make up a third of the credit score. Therefore, paying the installment timeously even on revolving loans or credit plans can elevate ratings. Credit is a very handy instrument to have – in the hands of responsible payers.

Remember, there is an advantage to obtaining something by borrowing a bank’s money to pay for it, but the credit still has to be paid for in the future. Credit ratings are therefore based on how strategic people are with a credit facility.

Clients who do have a second credit card should try to maintain it at a zero balance, where necessary. This adds to a person’s credit score, even if it is not being used. Adopting a responsible attitude towards a credit card facility – buying what can be afforded – helps in meeting obligations. 

Financial experts believe ensuring the charges on credit limits do not exceed 10% is a sure way of helping credit ratings.  This rate can comprise a big percentage of a credit score.

2. Retail accounts

Unsecured loans such as retail in-store credit cards can also help maintain a healthy credit score. However, keep retail accounts to a minimum based on what is needed.

A spouse can also co-sign when applying for such a card or a parent or friend can stand in as surety if the applicant is unmarried or single. It is up to the individual to maintain the monthly payments on the retail account, which will boost the credit record.

Consistent, responsible settling of the monthly installment is required to maintain the credit rating at acceptable levels.  Paying more money into the account can also serve as an advantage as it increases the credit limit on the retail account.

3. Managing a home loan

A secured loan such as a home loan is an ideal vehicle with which to improve credit scores.  However, due to the size of these types of loans, the credit rating will only improve once there is a commitment from the homeowner to pay up the bond installment every month.

Financial experts reckon it is best to make bond payments consistently over six months before making any credit of significant size.

The debt-income ratio is an important factor when being assessed for creditworthiness. In a nutshell, this translates into “living within means”.

Many parents are known to have told children in their growing up years at some stage: “Cut your suit according to your cloth.” This means tailoring a budget to specific needs. Bureaus keep a watchful eye over income-spending patterns and are an important yardstick to obtaining credit, as responsible spending can boost credit scores significantly. 

Investopedia.com says it is best to keep the debt-income ratio to no higher than 36%, with no more than 28% going to mortgage payments. If you know you will purchase a home shortly, don’t take on other debt obligations. Keep your debt-to-income ratio low.  

4. Debt counseling

Debt counseling is a debt-relief measure introduced by the National Credit Act of 2007 to assist people who are unable to pay their debts. Once the applicant’s financial situation has been reviewed and is placed under debt review, they cannot be blacklisted for bad credit.

During debt review, a qualified agent will negotiate with debtors to consolidate debt and draw up an affordable monthly payment plan on behalf of the client.

The person who is in bad debt will discuss a newly revised repayment structure with the debt counsellor, who then negotiates the new terms with the debtors.

Debt counselling organizations must be registered with the National Credit Regulator (NCR) and be compliant with the rules of the Debt Counselling Rules System (DCRS), says News24.com.

Credit providers will no longer be allowed to take legal action if the debt review is successful.  Clients under this type of review should keep making their monthly payments regularly and responsibly.

If accounts are paid up over the time of the new payment structure in line with the debt review, the client would be able to regain a good credit standing.  Credit standing and credit scores can improve over time if payments are made responsibly. This means that clients can turn around their situation and become payers of good standing.

5. How to build credit with no credit

Those who live by the motto that sees them pay cash for all purchases and have never borrowed money, will not have a credit score at all. Their needs might change at any given time, however, and might have to borrow money sometime in the future. They may have to open a credit facility with a clothing retailer for example, which will be difficult if there is no credit record.

People who are in this situation can opt for a prepaid or secured card where they can top up with their own available money to build up a credit rating. They can ensure that regular monthly payments on these credit cards will boost their credit score with the credit bureau.

Alternatively, they can acquire a credit card with a very low credit limit. As they continue to pay their monthly installments, the credit bureau will take note of it and steadily build up the credit score as a result of exemplary payment patterns.

The lender providing the credit will also increase the credit limit on the card, as payments are made, which will also increase the credit rating with the bureau. Banks also allow clients to pay extra into credit cards, which will reduce interest while having the added advantage of boosting credit scores.

The public is allowed one credit report of the running of their finances from the SA Credit Bureau. A detailed account of a client’s credit report can be obtained from the credit bureau’s website. According to debtbusters.co.za members of the public who want a more in-depth understanding of a credit report, can use a credit monitoring service such as Kudough.

Consumers should know that they will be better prepared for credit commitments once they have studied their payment history on their credit report

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