At its simplest, a credit score reflects your credit worthiness as an individual. It’s based on information provided by credit bureaus like TransUnion and Experian.
Scoring takes into account your age, employment, level of debt and payment history. The higher the score, the better. The more stable your risk profile, the better the chance of getting credit from a bank or financial institution.
So, how do you get (and keep) a good credit score? And how do you bounce back from a bad one?
Is your debt manageable?
Few of us are lucky enough to have a clean slate when it comes to debt. Some of us may still have student loans.
Most will have service providers and subscriptions (cellphone, digital satellite TV, etc) to pay every month.
If you have financed a vehicle or a home, this will also show on your credit score.
The best way to keep your score on track is simple—make sure you pay your monthly instalments on time and keep the quantity of debt as low as possible.
However, you should be aware of how too much unsecured debt (personal or microloans, credit and store cards etc) can affect your credit score. If you have too many of these on your profile, it can lower your score.
Keep in mind, your report will also reflect when and where you have asked for a quote on a loan or credit. A bank or lender will be able to see these requests and may base their decision on your overall behaviour.
Avoid the (not so obvious) debt traps
We all know that we should avoid the lure of easy credit. But some of the reasons for getting into debt and messing up a credit scores are less obvious, because these play on our emotions as much as our bank balances.
As a young professional just starting out, you may feel compelled to give back to family and friends who have helped, supported and encouraged you over the years.
While this is honourable, think carefully before you buy a car or home on behalf of someone else. If they’re unable to meet the payments, you will ultimately be liable for these debts.
Don’t overextend yourself, especially not when you’re just starting out and will need a good credit score to purchase a vehicle or home of your own.
Blacklists and other debt terrors
But, what happens if you’re overwhelmed by debt and your credit score falls?
Don’t ignore the situation. While it can be awkward or embarrassing, it’s better to have an honest, transparent conversation with your bank or financial institution if you’re unable to meet your monthly commitments.
In most cases, they will be open to finding a workable solution (eg reducing monthly payments until you’re able to catch up).
If you are seeking counselling, always do your homework. Debt counsellors, consolidation firms or attorneys may take your first couple of payments to just cover their fees.
And while many will promise to keep you off the dreaded black list, the truth is that your debt probably won’t be written off.
Even applying for sequestration isn’t always a way out of trouble. If you’re declared insolvent, your debt will be written off against any assets you have and you will still have to pay the balance over two years.
You probably won’t be allowed any bank account and almost certainly won’t be given any credit until you’re fully rehabilitated.
While it may take a while to rebuild your credit score, it isn’t impossible — so don’t lose hope if you find yourself in a bad credit situation.
What’s your score?
Your financial health is your responsibility, so it’s a good idea to know your credit score. You can get your credit score online for a small fee.
Not only will you know your current credit score, but you will also be alerted to fraud warnings potential identity theft, and insolvencies or court orders against your name.
Some websites that offer you a free credit score are often used as platforms to promote credit cards and loans with high interest rates.
Investec Private Bank Account offers digital rich features to empower your financial health
With Investec Digital, you have access to Manage my finances, a feature that allows you one consolidated view of your finances.
It tracks your income and spend, and pulls together your assets and liabilities in one dashboard. You can add and connect accounts from other financial institutions so you have a 360-degree view of your finances – and more control over your money.