When you apply for a home loan, one of the first things your bond originator or bank will do is check your credit score, that all-important indicator of the level of risk you represent to the lender.
“A good score is the key to being able to access all forms of credit - including car loans and store accounts, as well as home loans - and is based on your history of payment on all previous and current accounts, as well as the percentage of your available credit already being used,” says Rudi Botha, CEO of BetterBond, national bond originator.
“It is a quick way for lenders to gauge the probability of you repaying your debts and managing your finances responsibly, and it is so widely used that is it very surprising to us that most South Africans have no idea what their score actually is, or what factors could exert a positive or negative effect on it.”
The different credit bureaux in SA all have slightly different ways of calculating your credit score, he says, but in general scores range from around 350 to 999, and what you should be aiming for is a score of 600 or more. “At this level, you should not have any problem getting a loan, provided it is within your means to pay the monthly instalments.”
“And the higher your score is above 650, the more likely you are to be able to negotiate interest rate concessions, which in the case of a home loan can save you hundreds of rands a month - and many thousands of rands over the lifetime of the loan,” says Botha.
“For example, a 0.5% concession on a 20-year loan of R1.5 million translates into potential savings of R6 000 a year off your home loan instalments, and more than R120 000 worth of interest over the lifetime of the loan.”
This is why it can come as a big disappointment to find that your credit score is not as high as you thought it would be, especially when you’re diligent about always paying your bills on time, says Botha. “Fortunately, however, most of the reasons this could happen are relatively easy to fix.”
Botha discusses four potential problems, and how to overcome them:
1. Too many recent inquiries against your credit profile
The first potential problem is that there have been too many recent inquiries logged against your credit profile. “Of course it can pay to shop around when you’re looking for credit on favourable terms, but each time you request a quote, the lender will want to see your credit record, and if your requests are spread over more than few days, each inquiry will be logged separately and it will look like you are applying for several different loans or other forms of credit.
“This is one of the reasons why you shouldn’t apply for car finance, for example, at the same time as you are trying to buy a home. It is also why it is always better to apply for a home loan through a bond originator. “We only need to pull your credit report once before submitting your application to multiple lenders and ensuring that you get the most competitive interest rate.”
2. Old credit record blemishes or misunderstandings
Secondly, Botha says, your lower-than-expected credit score could be your past catching up with you.
“We often find, for example, that prospective borrowers have black marks on their credit records from years ago because they forgot to actually close an old bank account, for example, and the monthly fees have been mounting up unpaid. Or they may have changed address and missed a bill or two,” he says.
“Alternatively, they may have had a debt judgment against them and paid it off, but not realised that they needed to advise the credit bureau and have it removed from their record. And sometimes it is just a question of the credit bureau actually having the incorrect information, such as the wrong initials or the wrong ID number and penalising the client for someone else’s bad payment record. This is why you should check your own credit record at least once a year.”
3. Utilising too much of your available credit
Thirdly, says Botha, consumers can be penalised not for using too much credit, but for using credit too much.
“Your score will be lowered if you max out your credit card every month, even if you pay off the balance on time and in full before the due date. What matters here is how much credit you have available and how much you’re using - or your credit utilisation ratio - so you should try to keep the balances as low on possible on all your lines of credit.”
4. Not having a credit history
Finally, Botha says not using credit at all can also have a negative impact on your score. “Many people have been taught to save for what they want and never get into debt, but if you have no credit history, there’s nothing to show that you’re a responsible borrower who can manage balances and payments. It’s better to maintain at least one active account, like a phone, store or rent account, that you are careful to pay in full and on time every month.”