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Why is your credit score as important as your ID number?

For all SA citizens and permanent residents, your ID number ensures you can be uniquely identified in the system. This makes it easy to access public services such as opening accounts, applying for a driver’s license, passport, and all administrative services.

In the context of your credit score, it enables you to access funding provided by lenders or banks, which helps you acquire assets faster and handle immediate financial commitments without having to save up over months and years. This ability to get credit is made possible by good conduct in your credit repayment behaviour, which is indicated by a “credit score”.

Banks use this credit score to assess your ability to repay loans in a timely manner, for your future borrowing needs. The simple understanding is that a high credit score depicts a higher level of creditworthiness, meaning your repaying your loan obligation(s) is good and vice versa. However, a lower credit score does not necessarily mean you don’t get approved for credit, it just means banks will “price” for the risk they take or give you a reduced amount of credit.  

It is important for consumers (borrowers) to understand how to influence their credit score, by understanding the factors that make up the credit score such as your history of making consistent repayments, the nature of credit you take out, the amount of credit you have received in the past, including the length of your credit history. These factors are important for the following reasons:

  • Your history of making consistent repayments tests your commitment and reliability as a borrower;
  • The nature of credit you take out tests your reliance on credit or your income to fund your lifestyle;
  • The amount of credit you have received in the past tests your exposure to credit relative to your income; and
  • The length of your credit history tests the level of maturity and experience in your use of credit.

Having a good understanding of the factors that affect your credit score is key to managing your score effectively. However, it’s important to understand the score itself, as different credit products require certain minimum scores. A product like a home loan requires a credit score higher than that for a vehicle or personal loan. The main reason is the large size and length of the home loan in comparison to other products.

The home loan will attract a higher minimum credit score of about 640. A score of 600 and above might give you a fair chance of getting your home loan approved, though it may vary according to which bank assesses your application. A score of 670 and above is considered an excellent credit score, significantly boosting your chances of getting approved. Therefore, an excellent credit score is one of the most important assets any potential homeowner can have.

Each year the National Credit Regulator compels credit bureaus to give each citizen the ability to get a free credit report to know their score and be alert to any changes in their credit history, to ensure citizens can proactively manage their credit scores.  

When you’re looking to purchase property, getting a preapproved home loan that indicates your credit score as good or excellent makes you a valued customer to estate agents and the banks alike. Estate agents will be willing to find the right property for you and banks will be willing to lend to you, at the best rates, as they view you as being of the best risk profile due to your favourable credit score.

Life happens to all of us, and we may not always conduct our use of credit appropriately by not making consistent repayments on debt commitments. This will negatively affect your credit scores so it’s important to understand how to improve it once this happens.

Start by reaching out to your creditors and getting into a payment arrangement to catch up on the arrears owed, by paying back what you can afford over an agreed time frame. Improving your credit score could take from three months to a few years, depending on the severity of the default situation.

By working with a home loan comparison service like you can get a free preapproved home loan or advice on how to improve your credit score and make the most of the bank’s credit to access the property market.