What Is a Credit Score?
For many South Africans, a credit score is a superficially understood concept that is never really looked into. But the reality is that, for any chance of home loan approval at a decent rate, it's worth finding out what your credit score is and how it can be improved – if needed.
Essentially, your credit score will give a bank some indication of your past repayment behaviour, allowing them to assess your risk level and affects how likely you are to be approved for credit applications.
Ranging from 0 to 999, a credit score in the higher figures indicates good repayment habits, making you a lower risk individual more likely to secure a loan at a favourable interest rate. If, however, your credit score is somewhat lower, banks might consider you a too high risk for a home loan, or they'll only agree to a home loan at a higher interest rate.
What Determines a Credit Score?
What Factors Are Considered?
The credit score is calculated by combining a number of factors that paint a picture of your overall risk. These include:
- Your repayment history, including missing payments or not paying on time. Even if this happens on just a few occasions, it can impact your score.
- Your employment history and financials.
- How much debt you currently owe and how much available credit you have.
- The type of credit you've applied for in the past and how often.
- The length of time your accounts have been open.
- Any court judgements against you such as blacklisting.
What Is a Good Credit Score?
As mentioned, your credit score is anywhere from 0 to 999, outlining your financial decisions and risk for any future loans. Although it will depend on the individual, here is a look at where you sit in terms of risk and scoring.
- An excellent rating would be anywhere from 767 to 999, with the consumer considered very low risk.
- A good credit rating would be from 681 to 766, and you're likely to be approved of a home loan with this.
- Another medium-risk rating is 614 to 680; however, you might have some difficulty securing a home loan.
- Below this, you are in a higher risk category with 583 to 613 considered a ‘potential high risk'.
- Below 583 you're considered to be high risk and unlikely to secure a loan.
Why Would Your Credit Score Be Lower Than Expected?
- If you have a significant amount of available credit, even if unused, banks could be concerned that you have the potential to get into a large amount of debt if used all at once.
- If your credit record is shorter than six years prior, then there hasn't been sufficient time to calculate your total credit score, making it seem like you're a higher risk.
- Likewise, if you have very few credit accounts in your name, then there's an insufficient credit history to rate you.
- Any unanticipated missed, or late payments could count against you.
- Any account balances that are close to the credit limit indicate an over-reliance on credit to make ends meet.
How Can You Improve Your Credit Score?
Check your credit
By regularly checking on your credit report, you're able to monitor your ranking and ensure all relevant details are correct for an accurate credit reflection.
Meet payment dates
You need to ensure that all your outstanding credit accounts are paid on the due date. If you foresee any difficulties, you'll need to contact your credit provider to agree on a payment plan.
If you're likely to forget when a payment is due, make sure you set up a debit order so that payments aren't missed. And when you can pay more than the minimum instalment, do so.
Avoid the limit
If you're continually reaching your credit card limit on any accounts, then try to reduce your balance so that you're not showing outstanding debt in your name.
Ensure you have a credit history
Somewhat of a double-edged sword, you have to have some form of debt to get a credit score, which is why opening accounts is necessary before applying for a home loan. Without this, banks cannot determine your risk level and grant your loan.
Keep debt to a third
If your outstanding debt is more than a third of your income, you might be considered too high risk for a home loan, so ensure you're managing your debt effectively.
Choose credit wisely
revolving loan or over-reliance on credit cards will result in you paying off exorbitant interest rates. Make sure you check rates before signing up.
Close once paid
If you're able to, close any account that you've paid off as this will indicate you're a much lower risk.
Avoid multiple loans
Don't apply for more than one loan at a time as this might indicate problems with your financial status. So, if you're looking to apply for a home loan, avoid any other loan applications for a while.
Depending on your antenuptial agreement, lenders might also take your spouse into consideration when you apply for a loan. If you're looking to get a home loan, make sure your spouse's credit history is also up to scratch.
How Long Does it Take to Reflect an Improved Credit Score?
Obviously, this will depend on the individual, and what credit score rating you're starting out on, as well as which areas, needed the most attention. However, by following the aforementioned steps and consistently working on your credit, you should start to see your credit rating progress about three months after you begin.
Although minor incidences over the past few years shouldn't be too impactful – they reflect for about two years - you must be aware that more serious activities that reflect in your credit history can remain for up to 10 years. Some of the more negatively impactful options include late payments, lawsuits, and filing for bankruptcy.
What Score Do You Need to Qualify for a Home Loan?
When it comes to lenders assessing individuals for home loan qualification, each case is evaluated individually, so there's no real way to tell whether your particular credit score will get you a home loan. Having said that, it is an important part of any assessment as it gives quite a clear indication of your risk level, which means a higher credit score – over 600 – gives you a much better chance of securing a home loan at a favourable rate. Added to this is having a good debt-to-income ratio, around 36% of your gross income, at a maximum, as well as healthy spending habits.