Is a good credit rating really important? The answer is definitely yes.
We all need credit to buy a house or a car, and without a good credit score, the bank won’t even look at you. The bank takes a risk when they lend you money and your credit score tells the bank if there is a risk that you will not repay the money.
According to Debt Rescue, most South Africans (73%) run out of money at the start of the year and end up living on credit to get by, setting the trend for a perpetual cycle of debt. Additionally, more than 41% of consumers nationwide are currently under tremendous financial pressure, struggling to make ends meet, and living on credit to pay off debts and living expenses.
“The reality is that most South Africans spend 75% of their disposable income on debt and tend to cover living expenses such as groceries with their store or credit cards, which only makes ‘worsen the spiral of debt,’ says Neil Roets, CEO of Debt Rescue.
“The economic collapse of Covid-19, along with soaring fuel and electricity prices, has pushed South Africans into a corner, where living on credit seems to be the only solution,” he warns.
How to Build a Positive Credit Report
To increase your credit score, you can:
- ensure payments are made on time
- try to pay more than the minimum
- avoid applying too often, as each application can potentially affect your credit score
- make sure your service contracts, such as cell phones and insurance, are also paid on time each month.
Roets says store cards look attractive but are also addictive because they make it seem like it’s easy to buy now and pay later, but you’ll pay exorbitant interest rates later. It’s also easier to put purchases on your card, especially when you’re low on cash. Roets advises cultivating the habit of buying on credit only when absolutely necessary.
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Make good credit decisions
Not all credits are bad. “If you’re borrowing money from a bank to finance your education or putting down a down payment on your house, that’s wise, because both of these are assets that will pay off later. If you’re borrowing money to pay for a vacation, that’s not a good idea. Although you will create incredible memories, you will be poorer for it.
Budget, budget, budget
Roets says it has never been more important. “With the impact of things like fuel price increases and electricity hikes, it’s necessary to know exactly what’s going on with your personal finances and the best place to start is with a budget.”
This includes an understanding of your past repayment behavior to allow the bank to assess how much credit you are potentially eligible for and at what interest rate. Your risk, whether low, medium, or high, is a living number that fluctuates based on your repayment behavior.
Why is your credit rating important?
A good credit score is not something we often think about until we apply for credit. Your credit score and other factors affect whether you get credit, how much you can borrow, and most importantly, how high your interest rate is, says Ester Ochse, product manager: FNB Money Management.
“A credit score is basically a report card of how you manage the credit given to you by various financial institutions and retailers. Products such as credit cards, personal loans, home loans, and retail store cards are forms of credit. »
Your credit status is usually displayed as a number on various credit bureaus and the higher the number, the better you have been at managing your current and past credit. This score tells financial institutions the level of risk they will take if they extend credit to you.
A negative credit score
Factors that will negatively affect your credit score are:
- late monthly payments
- missed monthly payments
- frequent credit applications
- increased use of credit
- a bad debt judgment against you
- be declared bankrupt.
A positive credit rating
“If you’ve ever taken out a loan, posted a bond, applied for a credit card or even a cell phone contract, you may have a credit score. Your score tells potential lenders how risky you are in terms of past debt repayment behavior,” says Ayanda Ndimande, Sanlam’s business development manager for retail credit.
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What does a good credit rating look like?
Ooba, a company that helps South Africans get home loans, rates credit scores using the following ranges:
- 300 – 609 = Poor
- 610 – 649 = Fair
- 650 – 699 = Good
- 700 – 749 = Very good
- 750 – 850 = Excellent
This scale varies slightly depending on the credit union you are using. According to MortgageMarket.co.za, “The minimum credit score for a home loan in South Africa is around 640. A score of 600+ will give you a good chance of getting approved for a home loan, although that may vary depending on the bank you use. .”
If you have a good credit rating, lenders will usually give you loans at the prime rate and it won’t change unless the repo rate changes. Customers with very good and excellent credit scores can get a prime rate of -1% or -2% and customers with poor credit can get up to +3.
What does it mean?
Jackie Smith, customer contact center manager at Ooba, says a good credit score could potentially save you hundreds of thousands of rands if you’re buying a new home, as it allows you to negotiate a higher interest rate. down.
The table below shows the impact of different interest rates using the example of a 1.5 million rand home loan, repaid over 20 years. A person with a prime interest rate of +2% would pay around R677,351 more than a person who got a prime interest rate of -1%.
|Interest rate||Payment amount||Total refunds||Total interest payable|
|Premium + 1.0%||R13,256||R3,181,359||R1,681,359|
|Premium + 2.0%||R14,228||R3,414,661||R1,914,661|
*These figures are indicative only; other costs may also be included.
Each loan is negotiated on your individual merits and your credit score is not the only criterion that will affect your loan.
“A home loan applicant’s credit bureau score is not the only factor that determines the interest rate the bank will charge. Factors such as the size of the home loan, the size of the deposit, the area in which the property is located and your occupation are some of the additional factors that influence the interest rate.