How your credit score works and how to improve it

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A credit score, also known as a credit score, is a number that reflects the likelihood that you will repay the money you want to borrow.

Lenders like banks and credit card companies will look at your credit profile and calculate your credit score based on that information as well as theirs, which will show them the expected level of risk in lending you, writes Annelene Dippenaar. , legal and compliance manager. agent of the credit risk company Experian Africa.

The higher your credit score, the better your chances of being accepted for credit at the best rates. A decent credit rating is essential for getting credit because the higher it is, the less credit risk you have.

Credit providers also “cost” the risk, which means you may also be in a better position to negotiate more competitive credit rates if your risk profile is lower. There are mainly two types of credit scores, general bureau scores and custom scores:

General Bureau credit scores are provided to you by the credit bureaus. The score on your credit report is a general guideline for your risk profile. Each desk has its own scoring calculations and scoring strips, so your score may be different from desk to desk. For example, a score of 650 at one office may be the same as a score of 400 at another office.

Personalized credit scores are designed for use by individual lenders. They are specific to the specific business and risk appetite of that lender. They rely on credit reports and other information, such as account history, from the lender’s portfolio to calculate the score.

Custom credit scores can apply to specific types of loans, such as home loans or vehicle financing.

Credit Score Factors and Improving Your Credit Score

There are a number of factors on your credit report that determine your credit scores. Some factors that can affect credit scores are:

  • How you pay your bills
  • Your total debt
  • Types of accounts held
  • Number of accounts
  • High utilization of available revolving credit
  • Late or missed payments
  • Account age
  • Court orders, administrative orders and judgments
  • Debt review
  • Several credit applications in a short period of time

This is not a complete list of factors that may affect your score; however, they indicate some of the elements of your credit history that could affect your credit score at the time it was calculated. They also tell you what you need to deal with in your credit history to become more creditworthy over time.

Regularly monitoring your credit can help you keep a close eye on how these factors are affecting your score and what you can do to improve your score.

Common tips for building a good credit score

The first thing any lender wants to know is how much you are paying off your accounts. Repayment history is therefore, in most cases, an important rating factor.

It is therefore essential that you pay your installments on or before the due dates and never miss any payments, even if you have made a lump sum payment in the previous month which will cover the payment for the following month.

Another important factor is the use of credit from your credit cards and bank cards. If you are using 30% or more of the line of credit available to you, this may be an indication of risk. The reason is that you are highly dependent on all the credit that is available to you and that you are likely to “maximize”.

The rule of thumb here is to use your credit accounts responsibly. However, you need to make sure you keep these balances at 30% or less of your credit limit and make your minimum payments on time each month. Always remember that in most cases interest is paid on these credit accounts.

Another important and often misunderstood scoring factor is the length of a credit history. Consumers follow the advice to open accounts to improve their scores; however, this will not automatically improve your score.

You will need to display good repayment behavior for at least six months to a year under the specific account in order for your score to accumulate significantly. You must therefore carefully weigh your real need and your ability to repay an account before opening it.

Likewise, if you are in arrears and pay off your account in full, it may still take a few months for your credit score to show a change, as negative repayment history will still have an impact on your. score as a prediction of future repayment behavior.

Another scoring factor is the credit mix. Different weights are attached to different types of accounts. Usually, the weighting of the different types of accounts depends on what the score should take into account.

For example, at a retail credit provider, revolving credit accounts (store cards) and credit accounts (credit cards) might carry the most weight. A mortgage provider would weigh more heavily on secured loans (such as mortgages or vehicle financing) than on other types of credit.

Usually, service-related accounts, such as cell phone and insurance accounts, have a low weight. Again, the advice is not to apply for credit that you can’t afford or need just to boost your score.

The scores also examine the new credit. Opening multiple credit accounts in a short period of time can have a negative effect on your score, especially for people who don’t have a lot of credit history. This effect should balance out, however, as you develop your good repayment behavior under these accounts.

Other types of negative or unfavorable information such as judgments, receivership orders, administrative orders, follow-up alerts, and debt review statuses also negatively affect a score.

All credit has the potential to be good or bad; To build a good credit history and good credit rating, consumers need to make sure they pay their full installments on time, don’t miss any payments, and can afford the credit they get. throughout the duration.

  • By Annelene Dippenaar, Legal Director and Head of Compliance at the credit risk firm Experian Africa

Read: How To Calculate Your Credit Score – And Why It’s So Important



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