10 Jul Credit Scores Explained

Understanding your credit score is crucial to mapping out your financial strategy and understanding limitations on credit. Credit impacts your financial agency, and so doors to the future you would like. You need good credit to purchase your first family home, access car repayments, get better health insurance premiums, and secure high-quality rental properties.

Credit scores are really just 3-digit representations of your financial health. The bureaus calculated them using formulae that take into account credit utilisation rate, derogatory marks, payment history and length, and how stable your personal life is–more on that later. Scroll to understand what credit scores are comprised of, the types of scores you get, how to fix your score, and how you can check your credit score for free online.

An Overview of Credit Histories

Credit scores usually range from 300-850, though some bureaus, like XDS, have scoring ranges up to 1000. They’re calculated differently from bureau to bureau, but generally use:

Credit Utilisation Rate

This is how much credit is used compared to your limit or what you have available. Credit utilisation rate/ratio is usually expressed as a percentage. A lower rate is better. In fact, the bureaus recommend that you maintain one at 30% or lower. A high utilisation rate illustrates that you’re overly reliant on credit and so more likely to default– something that would be detrimental to you and your creditors.

Derogatory Marks

Bad marks on your credit report can look like debt review flags, defaults, judgements, administration orders, repossession, or bankruptcy. These marks tell the bureaus that you have grossly misused credit in the past. Derogatory marks pull down your credit score a lot and make it almost impossible to access credit.

Payment History

Payment history includes items like on-time and late payments, accounts and balances you have open, paid-off items, and other credit lines you have open.
Length and diversity of credit portfolio: a diverse credit portfolio shows that you are an experienced and responsible user. A diverse credit mix includes a melting pot of store cards, revolving credit (like credit cards), and instalment loans (personal loans and mortgages). The length of your credit score matters too. The longer you have been using credit, the more experience you likely have managing it well.

Inquiries and Personal History

By personal history, we don’t mean past partners and work experience, we mean address history and change of name and contact details, as well as whether you are tax-compliant. If you’ve moved around a lot, the bureaus might construe that you are financially unstable or unable to keep up with rent payments.

This is what’s in your credit report. There are several different credit score meanings, too, which you can read about in one of our previous blog posts.

The most common credit score formulae, used by the South African Big 3 (TransUnion, Experian, XDS) are FICO and VantageScore. These have slightly different scoring criteria but are very similar. A high VantageScore means you’ll likely also have a higher FICO score.

Fixing Your Credit Score

If you have a low credit score, there’s no need to fret! There are several strategies you can use to raise your score, like:

• Paying off balances: higher balances usually make for higher credit utilisation rates, which we don’t want.
• Removing derogatory marks: bad marks like debt review, administration orders, judgments, repossession, and bankruptcy can wreck your credit score. Use a credit clearance service to help you dispute these items with the bureaus.

Remember, hard inquiries will usually disappear after around 6 months. Try not to apply for too many loans at once, too. It shows the bureaus that you’re desperate for credit, and lenders are less likely to loan you money if they perceive you as financially unstable.

Now that you understand the mechanics of credit scores and what you can do to raise your score, it’s time to take action. Pay off your balances, remove negative items from your report, and check your report regularly.

If you would like to check your credit score for free without hurting your credit, use Credit Boost’s free online credit checker. You’ll get access to a full credit history and score with no impact on your score. This is because it’s something called a soft inquiry. If you have questions about credit or fixing it, be sure to get in touch with Credit Boost. We would love to help you regain financial control.