How credit scores work

27/12/2019

Your results are in! Do you know your credit score?

Your credit record affects almost every major milestone in your life. If you’re wanting to buy a house, a new car using credit, or even get a phone contract - you’ll need a healthy credit score. This score is what creditors use to evaluate whether it’s safe or risky to provide you with credit. What makes up my credit score you ask? Only the credit bureaus know the formula.

The good news is, they have made the basic factors used to calculate credit scores available. Knowing and understanding each of these will help you make better financial decisions when taking, using and managing credit. And if you’re deep in debt, knowing these will help you improve credit score. We share some of the factors affecting your credit score in this blog.

The 6 credit score factors that matter most

Here are the 6 factors that make up your credit score. Understanding these will help you achieve a healthy credit score:

  1. Payment history: One of the biggest contributors of your credit score is how well you pay your debts each month. Are you consistent in making your minimum monthly repayments on your loans? When you default on your payments or are always late when having to pay, it affects your credit score. So if you’re wanting to build your credit score, paying your debts on time is the best place to start.

  2. How you use credit: The rule of thumb is to use no more than 30% of your available credit. The more you use, the lower your credit score. The less you use of the available credit, the higher your credit score will be.

  3. Credit history: This ingredient is the reason why experts advise that you keep credit accounts open, even if you’re not using them. The longer you can show you’ve had credit, the better your credit score will be. Unless you’re avoiding paying annual fees, then keeping your accounts open will help you improve your credit score.

  4. The kinds of credit you have: There is credit which is considered good credit, which is typically secured credit and is used to build assets like a home loan or vehicle finance. Having good credit, which you repay well, will support a good credit score. 

    Then there is credit which is considered bad credit. This is retail credit which is used for consumption, like retail store accounts which are used to buy food or clothing on credit.  If you have many retail store accounts with high usage of credit balances this will negatively impact your score.

    So having a good mix of credit means having good credit to build assets of value and limit use of bad credit like retail store accounts which are used for consumption to buy food or clothing

    Just remember to keep up with the payments to avoid a negative report on your payment history. 
  1. Credit inquiries: Every time you apply for a new loan or credit, the creditor will make what is called a ‘hard inquiry’ on your credit score to evaluate whether you are a safe or risky customer to lend credit to. Each inquiry causes a decrease in your credit score.

  2. Debt balances: This calculates the total amount that you owe to the different creditors in debt.

Next steps

While the four big bureaus are limited to one free credit report a year, African Bank is now offering unlimited access to your detailed credit report through an innovative partnership with TransUnion Credit Bureau. Ready to check your results? Register here and download your FREE report online or from your African Bank App.

If you’re looking to buy a house or car, or get a loan in the near future, focus on these factors. Then, focus your credit-building efforts on making your payments on time and keeping debt balances low.

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About African Bank

Our mission is to be a successful Retail Bank offering a wide range of products and services to the consumers of South Africa. The people who work for African Bank represent the diverse population of South Africa; therefore we are a reflection of you, of all South Africans. We seek to provide value - more than our consumers expect of us. We promise to live our purpose 'humanity through banking' in all that we do and we are confident that we can, because 'We are You'.