28 Aug 2023
Buying a home is the biggest financial decision you will likely make. As most of us aren't lottery winners and don't have a wealthy relative leaving us money in their will, we'll need help financing a residential property purchase. The better prepared you are for applying for a home loan, the better your chances are of it getting approved. Your credit score can make or break your deal. To make sure you're actively managing your credit score, here's what you should know about what a credit score is, the factors that lenders can use to calculate it, and how to improve it.
Every South African citizen over 18 who's ever purchased something on credit has a credit score and record. This number can range from 0 to 1000 — although having a score at either end of the spectrum is rare. All credit purchases and financial decisions you make are recorded in your credit report and this information is used to calculate your credit score.
Businesses ranging from banks and cellphone contract providers to retailers and internet service providers use your credit score to determine if you qualify for financing, how much you qualify for and what risk you could pose to them (which can impact how much interest they charge you or the length of your repayment period). In South Africa, the most popular credit bureaus determine that your credit score are: Experian, TransUnion, Compuscan and XDS.
There's no such thing as a single ideal credit score and your individual score will be informed by your past and present financial behaviour. It's important to note that credit unions generate credit scores using subjective criteria. Similarly, lenders can assess credit applications using a complex matrix of factors that changes monthly. While this means that what one business considers a good score can differ from the other, a score of 700 can be a good one to aim for.
South Africans are entitled to one free credit report and score a year from each of the four bureaus. Other organisations and applications also offer access to this information and can give you updates on your score and report throughout the year should it change. Shockingly, less than five percent of all South Africans take up this offer.
There are more benefits to knowing your credit score than just preparing you for a home loan application. You may find that the report has incorrect information negatively impacting your score, hindering you from making credit purchases. Knowing they exist means you can dispute errors and have them corrected and removed. While larger organisations use their own calculations to determine if you can afford a specific purchase, knowledge of your credit score can help your chances of successful approval before you make any application.
The value of a proposed purchase can impact the likelihood of your credit score being approved or rejected. For example, a retailer approving an account application at an affordably priced clothing shop will likely approve a lower score than a bank or business offering you a business loan.
The financial decisions your credit record lists are used as an indicator of your future financial behaviour — be they good or bad. A repeated history of missed or late payments can indicate that your financial situation is unstable. Non-payments that have escalated to a default, court judgment or declaration of bankruptcy can reveal that you lack the means or ability to manage your financial responsibilities. Other negative indicators are making many credit applications over a short period, using the maximum amount of credit available to you on one particular account.
You might think that refraining from taking out credit at all is a good thing, but a lack of history can indicate that you have no experience managing your credit. Positive indicators include having a limited number of accounts that you keep up to date and pay timeously as well as having an active credit line you use frequently but don't use to the maximum limit.
Keeping your credit score high or improving a poor one isn't an exact science — or a process that takes place overnight. Aiming for consistency over perfection and being patient will ensure the best results. Here are a few ways to do this:
Your credit score plays one part in the multi-step process of applying for a home loan. The sooner you prepare for the journey you're about to take, the better. Partnering with experts in home loans can assist you in navigating this. SA Home Loans are waiting to help you with this process, so contact our team today on 0860 2 4 6 8 10.