How to calculate your credit score – and why it’s so important

While the economic crisis caused by the Covid-19 pandemic has left 85% of South Africans in need of financial help, recent data has shown that South African’s credit scores are going up after the national lockdown which began in March this year.

The light at the end of the tunnel shows that 51% of South Africans now have a higher credit score than they did before lockdown. Short-term loan providers attribute the improvement of credit scores to a temporary reduction in defaults because of payment holidays offered to consumers at the beginning of lockdown.

Ayanda Ndimande, business development manager of Retail Credit at Sanlam said that as one would rely on a fitness trainer to advise them on the best fitness routines suited for them and a life coach for mentorship, so should one have a financial coach to guide them regarding their finances.

Ndimande said that consumers can do this with the help of a financial coach.

“A financial coach works with you on a continuous basis, focusing on the ‘here and now’ by helping you better understand your financial profile to become and stay financially secure. This includes understanding your specific financial challenges and the steps that need to be taken to improve your credit score.

“If you have a view and understanding of both sides of your personal balance sheet, it is the first step in becoming financially fit,” said Ndimande.

A financial planner on the other hand helps you holistically plan your portfolio to ensure you have adequate cover for your life circumstances.

Investec points out that there are two types of credit: secured credit means borrowing against an asset such as a home or a car, while unsecured credit includes things like store cards, credit cards or personal loans.

A credit score is a summary number based on your credit report, which contains information about the debt you’ve had, how you’ve paid it back, as well as your age and employment status.

When you apply for credit, the financial institution you’re applying through will pull a credit report from a credit bureaus. The report typically includes:

  • A two-year history of all the credit you’ve applied for;
  • The credit accounts you have and your payment history with them (including any late or skipped payments);
  • Any court judgments or defaults you may have against you.

All this information is then compiled into a single credit score, Investec said.

Most credit bureaus rate your credit score between 300 and 850:

  • A low score is generally considered to be between 300 and 579;
  • A fair score is between 580 and 669;
  • A good score is anything above 700.

The higher your credit score is, the healthier your credit is, which means you’re more likely to be approved for a credit application

If you want to understand how your credit score is calculated, why credit providers use this score to decide if you are a good or bad credit risk and how a good score can benefit you to negotiate interest rates, it is best to get a financial coach on board.

Below, Ndimande discusses how your credit score is calculated:

  • How you pay your credit obligations both currently and historically. This accounts for 35% of the score. A missed or late payment affects the score negatively.
  • How much and often you utilise credit made available to you. This takes 30% of the calculation and is based on the balances owed on loans and credit card.
  • The length of time you have actively used credit. The longer the history of credit and on time payment, the better the score. It is good to have debt that is well managed and is taken for good reasons. This contributes 15% to the overall score.
  • Type of credit available across all credit products contributes 10%. A mixture of long- and short-term credit can be favourable.

The most important aspects of credit is payment performance, managing credit and a good credit utilization, Sanlam said.

Improving your financial wellbeing is just as important as maintaining a good overall wellbeing. Consumers can do this by being aware of their finances every day so that they know what they are spending and how much they are saving, Ndimande said.

Read: Here’s why your credit score is so important – and how to improve it

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How to calculate your credit score – and why it’s so important