April 17, 2024

A high credit score is a flex

Why should you care about your credit score?

Your credit scores and credit history determine your loan terms, including interest rate. Most employers also check your credit score and report as part of your background checks. It speaks to how reliable and responsible you are, so maintaining a good credit score can also impact your earning-capabilities.


Some of the pitfalls to avoid when attempting to keep your credit score in tact or increase it.


1. Paying your bills late

Your payment history is the most important factor in the credit scoring formula and even one late payment can send it crashing. If you miss a credit card  or loan payment, this can do an enormous amount of damage to your credit score. Card issuers don't usually report a payment as late until you are 30 or more days behind. You can make sure this doesn't happen by setting up debit orders or scheduled payments on your online banking profile. 


2. Only making the minimum payment on your credit card

Making the minimum payment on your credit card will prevent the card issuer from reporting a late payment, but any remaining balance will begin to accrue interest. Try to pay the full balance monthly, in order to prevent paying interest.


3. Maxing out your credit cards

Carrying a balance raises your credit utilisation ratio. This measures the amount of credit you use each month versus the amount available to you. Ideally, you should keep this under 30%. 


A higher credit utilisation ratio indicates you may be living beyond your means, and it will impact your credit score negatively.


4. Applying for new credit often

One of the most common mistakes people make when trying to improve their credit health is applying for too many new loans too quickly. Each time you apply for a new loan, you are impacting your credit score adversely. Instead, try applying for one type of loan at a time.


5. Closing old credit cards without considering the consequences

Your average credit account age also affects your credit score. A longer credit history gives lenders a better understanding of how you handle your money, so they can make more informed decisions.

When you close a credit card, that account is removed from your average credit age calculation. If you've had the card for a while, this can lower your average account age significantly and it may hurt your credit score.

Sometimes it may still make sense to close the card. If it has an expensive annual fee and you rarely use it, it's probably worth the slight credit hit to get rid of it. But if the card doesn't have an annual fee, you may be better off keeping it in your wallet even if you never use it.


6. Not checking your credit report often enough

One of the best ways to maintain good credit health is to check your credit report often. In South Africa every consumer is entitled to one free credit report per year. You can register on TransUnion or ClearScore for your free report.


In conclusion

Maintaining a strong credit score is key to getting a favourable interest rate on loans, funding a home purchase, and even applying for certain jobs. Make sure that you pay your loan instalments on time, check your credit report, establish a good debt and cash flow, borrow from legitimate lenders, and dont apply for too many quick loans in a short period.


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