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 assistance, recent data has shown that South Africans’ credit scores are rising after the nationwide lockdown that started in March of this year.

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

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

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

“A financial coach works with you on an ongoing basis, focusing on the ‘here and now’ of helping you better understand your financial profile to become and stay financially secure. This includes understanding your specific financial challenges and the steps you can take to improve your credit score.

“If you have a view and an understanding of both sides of your personal balance sheet, that’s the first step to becoming financially capable,” Ndimande said.

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

Investec points out that there are two types of credit: secured credit means borrowing against something like a house or 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 incurred, how you paid it off, as well as your age and employment status.

When you apply for credit, the financial institution you are applying to will pull a credit report from a credit bureau. The report usually includes:

  • A two-year history of all credits you have requested;
  • The credit accounts you have and your payment history with them (including any late or missed payments);
  • Any court order or default you may have against you.

All of 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 over 700.

The higher your credit score, the healthier your credit, which means you have a higher chance of being approved for a credit application

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

Below, Ndimande explains how your credit score is calculated:

  • How you pay your credit obligations both currently and historically. This represents 35% of the grade. A missed or late payment negatively affects the score.
  • How much and how often you use the credit made available to you. This takes 30% of the calculation and is based on balances due on loans and credit cards.
  • The length of time you have actively used the credit. The longer the credit and on-time payment history, the better the score. It’s good to have debt that is well managed and incurred for the right reasons. This contributes 15% to the overall score.
  • The type of credit available in all credit products contributes 10%. A mix of long-term and short-term credit can be favorable.

The most important aspects of credit are payment performance, credit management and good credit utilization, Sanlam said.

Improving your financial well-being is just as important as maintaining good overall well-being. Consumers can do this by being aware of their day-to-day finances so 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

Aurora J. William