Why a good credit rating is important
Category Advice
Key terminology
- A loan can also be called debt, as it is something you owe to someone or an institution. Loan means to borrow and debt means to owe. You can have a home loan or a motor vehicle loan.
- A home loan and a bond are the same thing; the money a financial institution lends you to buy a property
- Credit means to borrow money from someone to purchase something for which you have to pay them back. In other words, you use their money to make a purchase. This refers to a credit card or store credit or account with someone.
- Terms refers to the agreed period it will take for you to pay off the loan along with how much you'll pay each month and other unique conditions attached to your agreement. A bond can be 20 years while a motor vehicle loan can be as short as 3 years.
- An instalment is an agreed amount that is paid monthly in order to pay off a loan; this is decided by the lender or bank not the borrower.
What is a credit rating or score?
Your credit rating, or score represents your riskiness when it comes to borrowing money from a bank or financial institution or service provider. The score ranges from 300 to 850 and the higher your score is, the less risky you are and the more 'trustworthy' you are financially. At the end of the day an lender needs to know that you will pay back the loan (if you don't pay this is called 'defaulting') and the banks are bound by law to check that you can actually afford the loan and that they are not lending money unscrupulously.
How is your credit score measured?
Before a bank or financial service provider will lend you money, they will have a look at your financial fitness and your credit score makes up part of your financial fitness test. Before lending you any money the bank or lender will want to know if you can afford to service your loan, or debt and whether there is proof that you qualify for a loan based on your income, your financial history and how good you have been about servicing your already existing debts like a motor vehicle, a credit card or an account with a retailer like Edgars.
Why do you need to know this?
You need to know your credit score if you want to apply for any kind of loan or credit, you may also want to know what your score is in order to improve it. Sometimes a tiny little thing can seriously affect your credit score like a small few Rands outstanding on a credit card or even an old debt you many be unaware was unpaid.
Where can you find your credit score?
You can find out your credit score on any number of free online calculators provided by a credit bureau like TransUnion, XDS or ClearScore. It literally takes minutes to find this out. By law, each South African is entitled to one free credit score assessment per year.
How can you improve your credit score?
Firstly, you don't have to be in massive debt to prove you should qualify for credit as the lender will say that it looks like you can't afford to pay off another loan. A poor credit score does not mean you won't be granted a loan, it just means they'll likely charge greater interest on the amount you borrow as you are deemed a risky borrower. Risky borrowers can be due to defaulting on an instalment due on a loan. On the flip side, if you have absolutely no loans or credit facility with anyone then the banks will be scared to lend you money as they have no way of knowing if you can or can't service the debt. If you have absolutely no credit facility with anyone then your credit score will likely be low too. Things like a car loan, a cellphone contract and an account (which is being properly serviced) with a retailer will demonstrate that a) you can afford to borrow money; b) you are able to service your debt and c) there is record that you have been paying your debts on time and to the instalment amount required and have not defaulted on payments.
Author: Devmco Realty
