Demystifying Credit Scores - An Easy To Understand Guide

Time to check the scoreboard

Your credit score is a pretty important number.

Why?

Well a good credit score not only influences whether or not you will get any finance you are looking to take, but it also plays a big role in determining the interest rate you get for that finance.

And this is important because even a small decrease in an interest rate can pack a big punch - especially when it comes to buying a house or a car on finance. You can end up saving a lot of money! And even for smaller debt, a lower interest rate will leave you a lot better off.

Fortunately it's pretty easy to understand how credit scores work, and it's also pretty easy to view and track your score for free.

So let's get into it!

What Is A Credit Score?

Your credit score is a 3 digit number representing how well you have handled your debt and payment obligations in the past.

It's pretty simple:

• If you have been a payment pro, then you'll have a high score.
• If you've been a little naughty with debt (oops), then you are going to have a lower score.

Your credit score is calculated by a credit bureau (an independent company which is licensed to collect credit information of individuals)

There are 4 different credit bureaus in South Africa:

• Experian
• TransUnion
• Compuscan
• XDS

The guys with the calculators

The 4 Credit Bureaus collect information about your credit and payment behavior (from lenders, utility companies and even mobile phone providers and insurers.) They use the information in a top secret (for real) formula to calculate your three digit credit score.

And just like that, you become a number :)

Now, because there are four different credit bureaus in South Africa, and they each use a slightly different method to calculate you score, it means that everyone will have four different credit scores. (Okay so maybe you are not just a number - you are four numbers!)

Each credit bureau also has a different maximum value that your credit score can be. For example, at Experian, your total score is out of 705. The other credit bureaus will use a different total.

The credit bureaus also normally include ranges of scores to categorise you, and you might find you fall into a category like "good", "fair" or "bad"

Where Can You Check Your Credit Score For Free?

Okay, so where can you find this magical 3-digit number? 

And naturally, if we can see it without paying for it, that's even better!

Well, by law, you are entitled to one free credit report (which will contain your credit score) from each of the credit bureaus. So one option is to go direct to each of the bureaus and ask for your free report.

But there's an easier way to get your credit score online, for free.

ClearScore* is a website that will give you your full credit report from Experian, and you can check it as often as you like (at no cost).

* I have no affiliation.

Getting set up is super easy:

1. Click Log In

2. Click Create new account

3. Go through the steps to register.

4. Once you are registered you will find yourself on their mailing list. You can just ignore or unsubscribe from any of the follow up emails with offers/promos for more credit etc.

And that's it! You are now ready to check your credit score for free.

Once you log in to your account you can immediately see your credit score displayed. Here is what it looks like (using yours truly as an example :))

Notice that the score is out of 705. That is because Clear Score pulls your data from Experian, and Experian calculates your credit score as a value out of 705. Remember, the maximum score at the other bureaus will be different.

You can then also click on "Report" to check your full credit report for free.

Your credit report contains your credit score  (which is what we have been talking about till now),  but it also includes:

• How much credit you have used 
• Your payment history (and if you’ve missed any payments) 
• Recent credit applications 
• Any defaults and court orders against your name 
• Details of your accounts

As an example, here is my credit report:

So it turns out that I have (mostly) been a good boy – although, as you can see, I lost some points on the multiple credit inquiries I logged last year while doing some research. That pulls my score down a little.

And that brings me to the next important section...

What Affects Your Credit Score?

There are multiple factors which are used to calculate your credit score, but the ones below have the biggest negative impact:

• Late/missed payments
• Defaults on debt
• Court Judgments
• Bankruptcy

Any oopsies on the above will stay on your report for 5 years, and have been known to scare lenders away.

The above 4 factors are the really big ones, but if you want a good credit score, you should probably consider the following factors as well.

Factor Affecting Your Score	Top Tip
Applying for credit Every time you apply for credit, a mark is made on your file	Don't apply for too much credit too quickly
How much of your credit limit you're using People who are up to their eyeballs in debt are at a higher risk of defaulting	Keep your debt repayments to less than 30% of your income
Age of accounts Older accounts help your score and look better in the eyes of a lender - age is beauty	Have a good track record of paying your accounts
Frequent change of address If you move around you are perceived to be slippery and difficult to find	Try not to move houses too often

Why Is Your Credit Score Important?

Before the lenders/banks extend a loan, they want to know how risky it's going to be. Someone saying "I promise I will pay you back" is quite simply not going to cut it.

You might know that you are good for the loan, but how does the bank know? Well one of the big factors they use is the value of your credit score.

To the lenders it's simple:

• High credit score = low risk 
• Low credit score = high risk

The way they see it, a high credit score means you have a history of handling debt well. This means you're a "good payer" and so you'll be more likely to get accepted for credit, and also more likely to get a better interest rate on your loan than someone with a low score.

How Do You Improve Your Credit Score?

Improving your credit score is about being responsible with credit:

• Don't overextend yourself 
• Pay all your installments on time, every time 
• Don't apply for credit multiple times in a short space of time

If you get the above three things right, your score will improve.

Just remember it is not going to happen overnight, but with each passing month the bureaus will recalculate your score and factor in your good payment behavior.

If however you are already struggling to meet your current debt obligations, there are a few things to keep in mind so that you don't totally obliterate you credit score:

• A late payment is better than being in default.
• Be proactive and get in touch with your lenders to try make a plan before your credit record gets really trashed
• Get professional help if you need to

What Is A Good Credit Score Out Of 705 In South Africa?

As I mentioned, your credit score at Experian that you can access for free using ClearScore, is out of 705. 

In South Africa, a credit score of between 650 and 669 out of 705 is considered to be "Good". Get into that band and you will get some brownie points from the lenders.

Below are the bands that Experian categorises your credit score into:

Credit score	Experian band
0-527	Very poor
528-602	Poor
603-649	Fair
650-669	Good
670-705	Excellent

If your score is below 528, it is considered "very poor". Anything above 650 is considered "good" and will likely count in your favour when applying for a loan.

But very important to keep in mind is that there isn't a golden number or rule that will guarantee you getting credit. Credit scores are only one factor that lenders consider, and a good credit score might still not be enough to secure you a loan.

Your credit score shows your credit-worthiness, but banks and lenders will also consider other factors like your income, employment and debt levels before deciding to grant you a loan. This is also why the same credit score can get you accepted at one lender but rejected by another.

Do You Need Debt To Get A Good Credit Score?

There's a common perception and gripe that I have seen coming up over and over again, and that is that you need debt to get a good credit score. That of course makes for one of those chicken and egg situations like when you need experience to get a job that will give you the experience you need to get the job...

The thinking is that without debt you can't get a good credit score, but without a good credit score you won't be able to get debt. If you are looking to buy a car or a house soon, this might be playing on your mind.

So do you need debt to get a credit score?

Well, as I mentioned previously, we don't know the secret formula the bureaus use, so we can't be 100% sure if previous debt is an absolute requirement. But from what I have seen, having a good debt repayment record is definitely helpful.

I did find something else very interesting on my credit report though. I noticed that both my cellphone and insurance accounts are listed.

It seems that having those types of accounts may also get you onto the credit score radar. How much it will shift the needle by, I do not know - but I would love to try find out. So if there is anyone out there who has only insurance and contract type products (like a cellphone contract) and has no debt history, if you don't mind sharing, please let us know if you have a credit score and what it looks like?

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Till next time, Stay Stealthy!
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