Credit Score
How does credit work?
Whether it’s buying a big-ticket item like your first car or flat, getting a student loan, applying for a credit card from your bank, or simply switching to a cellphone contract from a pay-as-you-go arrangement, you’ll need to have a good credit record to be able to access these financial facilities.
The term ‘credit’ simply means borrowing money from a financial institution that you must pay back at an interest rate.
There are two types of credit: secured credit means borrowing against an asset such as a home or a car, while unsecured credit includes things like store cards, credit cards or personal loans.
For all types of credit, you’ll first make an application to the lender, who will then check your credit standing before deciding whether to let you borrow money from them.
Your credit history will also determine the type of interest rate that you’ll be offered when paying back the money you borrow. In general, the healthier your credit history, the better the interest rate you’ll be offered.
Understanding a credit report
There are four main credit bureaus in South Africa: Experian, TransUnion, Compuscan XDS. Every month, credit providers send transaction details to these bureaus, who then compile the information into a credit report, consisting of a consumer’s credit history and habits.
When you apply for credit, the financial institution you’re applying through will pull a credit report from one of these four bureaus. The report typically includes:
A two-year history of all the credit you’ve applied for
The credit accounts you have and your payment history with them (including any late or skipped payments)
Any court judgments or defaults you may have against you
All this information is then compiled into a single credit score (we’ll discuss in the section below). A credit report is a snapshot of your financial behaviour that reflects how you manage your debt and reflects how much of a credit risk you’re likely to be.
Did you know you’re entitled to one free credit score a year?
As a South African consumer, you’re entitled to one free credit report per year with any of the major credit bureaus. You can also dispute any facts on the report that are inaccurate or outdated.
How does a credit score work in South Africa?
A credit score is a summary number based on your credit report, which contains information about the debt you’ve had, how you’ve paid it back, as well as your age and employment status.
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 anything above 700
The higher your credit score is, the healthier your credit is, which means you’re more likely to be approved for a credit application – and you’re also more likely to get a preferential interest rate at which to pay it back.
It’s worth noting that credit providers will also look at other factors. like your debt to income ratio – so even if you have a good credit score, a high level of debt can negatively affect your credit risk.
