What Affects My Credit Rating?

Particularly, when considered within the context of South Africa, the implications of a good or bad credit rating can significantly influence your financial life. From securing a loan for your dream home to getting approved for a much-needed credit card, your credit rating is the cornerstone upon which your fiscal opportunities are built.

Key Takeaways

1. Your credit rating is an integral aspect of your financial profile that impacts your ability to secure loans, negotiate interest rates, and even influence employment opportunities in certain sectors.
2. Payment history carries the most weight in determining your credit rating, making it critical to always make payments on time. A missed payment or a debt passed to a collection agency can significantly impact your credit rating.
3. Credit utilisation ratio is the second most influential factor affecting your credit rating. It is recommended to keep this ratio below 30%, demonstrating that you are not over-reliant on borrowed money.
4. The length of your credit history matters. A longer credit history provides a comprehensive picture of your financial behaviour over time, giving lenders more confidence in your ability to manage credit responsibly.

What is a Credit Rating?

In essence, a credit rating is a numerical representation of your financial behaviour. It is a score, typically ranging from 0 to 999, which lenders use to determine the risk involved if they were to lend you money. If you consistently demonstrate good financial habits, such as making payments on time and maintaining a healthy level of debt, your credit rating will be high. Conversely, missed, or late payments, excessive debt, or other risky behaviours can lead to a lower score. Your credit rating is like a financial report card – a high score earns you the trust and confidence of lenders.

Credit Rating Agencies in South Africa

In South Africa, your credit rating is not determined by one, but several credit rating agencies. These include well-known international entities like Experian and TransUnion, as well as local agencies like Compuscan and XDS. They collect data from various sources, such as banks, retailers, and public records, and use this information to create a credit profile. Each agency has its own unique algorithm to calculate your credit rating, but they all consider similar factors, such as payment history and credit utilisation. It is important to understand that different agencies may give slightly different ratings, but the fundamental principles remain the same.

Factors Affecting Your Credit Rating

The labyrinth of credit ratings may seem complex, but it is largely governed by five principal factors: payment history, credit utilisation ratio, length of credit history, types of credit, and new credit applications. Each of these elements plays a unique role in your credit rating, influencing it in different ways. As we dissect each of these factors, you will gain a clear understanding of how they affect your credit rating and how to manage them effectively.

Payment History

In the realm of credit, past behaviour is often seen as an accurate predictor of future behaviour. This is where payment history enters the picture. Your payment history – the record of how consistently you have paid off your debts – is the most significant factor influencing your credit rating. It includes the punctuality of your payments on credit cards, home loans, vehicle loans and other loans. Even one missed or late payment can impact negatively on your credit rating, reflecting negatively on your ability to manage credit.

Credit Utilisation Ratio

Next up is the credit utilisation ratio, which is the percentage of your available credit that you are currently using. To put it simply, if you have a credit card with a limit of R10,000 and you have used R5,000, your credit utilisation ratio is 50%. This ratio offers lenders insight into how reliant you are on credit. Maintaining a lower credit utilisation ratio is generally seen as positive for your credit rating, as it indicates responsible use of credit.

Length of Credit History

The length of your credit history is another crucial factor of your credit rating. This factor considers the age of your oldest credit account, the age of your newest one, and the average age of all your accounts. A longer credit history gives lenders more data to evaluate your borrowing habits. Therefore, if you have been able to demonstrate responsible credit behaviour over a long period, it could be beneficial for your credit rating. That is why it is often recommended not to close old credit accounts, as they contribute to your credit history length.

Types of Credit

The types of credit you have also influence your credit rating. This factor, known as credit mix, looks at the variety of credit accounts you hold, including credit cards, retail accounts, home loans, vehicle loans and more. A diverse credit mix suggests you can manage various types of credit responsibly, which can enhance your credit rating. However, it does not mean you should open different credit accounts just to improve your credit mix; rather, you need to show lenders your ability to manage a variety of credit products effectively.

New Credit Applications

Last but certainly not least, new credit applications play a role in determining your credit rating. Each time you apply for credit, an enquiry is made on your credit report, which may temporarily lower your credit rating. The rationale is that multiple applications within a short period may signal financial distress. That is why it is recommended to apply for new credit sparingly and only when necessary.

Payment History

Payment history carries the most weight in determining your credit rating. This is because lenders view it as a strong indicator of your future behaviour. If you have consistently paid your debts on time in the past, lenders are more likely to believe you will do the same in the future.

How Late Payments Impact Your Credit Rating

Let us consider a scenario: you have missed a payment on your credit card or loan. Unfortunately, this is not a minor hiccup; rather it is a setback that can cause your credit rating to decline. Payment history reflects your reliability as a borrower, and a missed payment sends a warning signal to lenders. The impact is even more pronounced if the payment is more than 90 days late. Remember, late payments can remain on your credit report for several years, which emphasises the need to make payments on time.

Handling Debt Collections and Their Effect on Credit Rating

Sometimes, missed payments can lead to debts being passed to collection agencies. This can have a severe impact on your credit score. The presence of a collection on your credit report can significantly damage your creditworthiness, making it harder to secure credit in the future. Therefore, it is crucial to address these issues promptly, either by paying off the debt or negotiating a payment plan with the collection agency.

Understanding Credit Utilisation Ratio

The second-largest factor influencing your credit rating: the credit utilisation ratio. This ratio is a simple yet powerful concept. It gives lenders a quick look at how much of your available credit you are currently using.

The Ideal Credit Utilisation Ratio

So, what is considered a good credit utilisation ratio? As a rule of thumb, it is generally recommended to keep this ratio below 30%. That means if you have a total credit limit of R10,000, try not to use more than R3,000. A lower credit utilisation ratio sends a signal to lenders that you are not overly reliant on borrowed money, which can have a positive impact on your credit rating. It is worth noting that this rule applies to each individual credit card as well as to your overall credit limit.

Ways to Manage Your Credit Utilisation Ratio

Effectively managing your credit utilisation ratio involves keeping your credit balances low and being mindful of your spending. Regularly monitor your credit card balances and try to make payments midway through the billing cycle to keep the balance low. If possible, consider requesting a credit limit increase from your lender, but only if you are confident, it will not lead to increased spending. Remember, the goal is to improve your credit rating, not to accrue more debt.

The Role of Credit History Length

This factor considers the age of your oldest and newest credit accounts, as well as the average age of all your accounts. A longer credit history tends to have a favourable effect on your credit rating, providing lenders with more information about your financial habits.

Why the Length of Credit History Matters

In essence, a longer credit history provides a more comprehensive picture of your financial behaviour over time. This extended look gives lenders more confidence in your ability to manage credit responsibly. An older credit account with a history of timely payments can be a powerful ally in your quest for a high credit rating. This long-term evidence of responsible credit use can help offset minor setbacks, like an occasional late payment on a newer account.

How to Build a Long Credit History

Building a long credit history requires patience and good financial habits. If you are new to credit, consider opening a low-limit credit card or a small personal loan and make sure to make timely payments. As you manage these accounts responsibly over time, your credit history will grow. Keep your oldest credit accounts open even if you no longer use them regularly, as these contribute to the length of your credit history. However, remember to always manage these accounts responsibly and avoid accumulating unnecessary debt.

Impact of Different Types of Credit

Revolving Credit vs. Instalment Credit

In the world of credit, there are two primary types: revolving credit and instalment credit. Revolving credit includes credit cards and lines of credit, where you have a limit, but you control the balance by how much you charge and how much you repay. Instalment credit includes loans where you borrow a certain amount and repay in fixed amounts over time, like a car loan or a home loan. A healthy mix of both types of credit can demonstrate to lenders that you can manage different forms of credit responsibly.

The Effect of Credit Mix on Credit Rating

While not as influential as payment history or credit utilisation, the variety of credit accounts you have can still affect your overall credit rating. Having a good mix of different types of credit could be beneficial for your credit rating. However, this does not mean you should rush out to open different types of credit accounts; instead, it is about managing a variety of credit products effectively over time.

» More: How is your creditworthiness assessed?

Unravelling the Impact of New Credit Applications

Whenever you apply for a new line of credit, the lender performs a hard enquiry, also known as a “hard pull,” to assess your creditworthiness. This hard enquiry can lead to a temporary dip in your credit rating. Therefore, applying for new credit should be a calculated decision, not an impulsive move.

Hard Enquiries and Their Effect on Your Credit Rating

A hard Enquiry stays on your credit report for two years, but its impact on your credit rating diminishes over time. While one or two enquiries will not cause too much damage, several hard enquiries within a short period could significantly lower your credit rating. This is because multiple enquiries may signal to lenders that you are experiencing financial hardship or overextending yourself by taking on more debt than you can manage.

Strategising New Credit Applications

The key to managing the impact of new credit applications on your credit rating is to apply for new credit strategically. Spread out your credit applications over time to avoid a cluster of hard enquiries appearing on your credit report within a short period. Furthermore, only apply for credit that you actually need and are confident you can manage. Remember, each credit application should be a step towards better financial health, not an obstacle on your path.

Monitoring Your Credit Rating: Why and How

Regularly checking your credit report can help you stay on top of your financial health, catch any errors, and take corrective action if needed.

The Importance of Regular Credit Checks

By regularly checking your credit report, you can ensure the information it contains is accurate and up to date. This is important because your credit report informs your credit rating. If there are inaccuracies or errors, they could unjustly damage your credit rating. Also, keeping a close eye on your credit report can help you detect signs of identity theft early on, thus allowing you to take swift action to rectify the situation.

How to Check Your Credit Report in South Africa

In South Africa, you are entitled to one free credit report per year from each of the major credit bureaus: Experian, TransUnion, and Compuscan. You can request these reports directly from the bureaus or through their websites. If you spot an error or discrepancy, contact the bureau immediately to initiate a dispute. Remember, staying informed is key to maintaining a healthy credit rating.

Improving Your Credit Rating

Key Strategies for a Healthy Credit Rating

Firstly, always make your payments on time. Even a single late or missed payment can hurt your credit rating. Secondly, try to keep your credit utilisation ratio below 30%. This shows lenders that you are not over-reliant on credit. Thirdly, maintain a long and healthy credit history by keeping old accounts open, provided they do not have high fees. Next, demonstrate your ability to manage different types of credit responsibly. Finally, apply for new credit sparingly and strategically to avoid hurting your credit rating. Remember, improving your credit rating is a marathon, not a sprint. Consistency and patience are key.

With these strategies at your disposal, you are well-equipped to navigate the terrain of credit ratings. However, the journey does not stop here. It is an ongoing process, with regular credit monitoring and adjustment of your credit habits as needed.

Overcoming Past Credit Mistakes

If you have made credit mistakes in the past, it is essential to realise that these do not define your financial future. Credit blunders, such as missed payments or high credit utilisation, can undoubtedly lower your credit rating, but their effect diminishes over time. The most effective remedy for past credit mistakes is to replace them with positive credit behaviour. With time, these new habits will become the more dominant factors influencing your credit rating.

Conclusion

Your credit rating reflects your financial behaviour over time. Each payment you make, each credit account you open or close, and even the way you shop for credit, all impact your credit rating. By understanding the factors influencing your credit rating, you can take control of your financial health and work towards improving your credit rating. Remember, a good credit rating can open doors to a wealth of opportunities, from securing a home loan to landing your dream job. It is worth the effort.

Frequently Asked Questions