In this tough economic time, many South Africans are turning to financial institutions such as banks and other money lenders for loans. A loan should never be seen as a quick-fix solution, and obtaining one is not as simple as 1-2-3. Lenders must be sure that they will get their money back, and one of the methods they use are credit scores.
Your credit score indicates your past credit behaviour – this helps lenders determine how much of a risk you may be when it comes to paying the loan back.
What influences a Credit Score?
Credit scores are closely linked to your credit history – this is a record of your ability to repay debts and purchases made on credit. As a consumer, your creditworthiness is evaluated based on your credit history report. Your credit score is then determined based on the following key factors:
The number and types of credit accounts you hold
The length of your credit history
The total amount you owe
The amount of available credit that has been used
How often you apply for new credit
Your payment history
What are the Credit Score Ranges?
Credit scores range from 300 to 850. You want to aim for as high a score as possible as a good score will give you a better chance of your loan being approved and at a favourable rate.
Individuals with below-average scores – 581 and lower – are seen as higher risk, therefore obtaining a loan will be extremely difficult or they will have to pay very high-interest rates.
Credit score ranges
1 – 580 = Very high risk
581 – 599 = High risk
600 – 619 = Average risk
620 – 649 = Low risk
650 – 999 = Minimum risk
How to Improve Your Credit Score
It’s always best not to borrow money too frequently and only spend on purchases that are absolutely necessary. When the time comes that you do need to borrow money, it would be in your favour to have kept good spending habits.
As with most things, keeping it simple can help you achieve your goal. Remember three basic rules:
Keep credit cards to a minimum
Always ensure your payments are made on time
While your credit score is extremely important when applying for credit, you need to know that there are other factors just as critical – such as your affordability and income. The earlier you start building up a good credit history, the easier it will be for you to finance a car when the time comes.
Disclaimer: This information is for educational, or entertainment purposes only. It must not be construed as advice, legal, financial, or otherwise. We do not make any warranties about the completeness, reliability, and accuracy of this information. The views and opinions are those of the author and not necessarily those of Auto Pedigree.