How credit scores work

13/03/2019

This is how credit scores work

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 your credit score? 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: Having a mix of the different types of credit accounts has an impact on your credit score. This means having a good mix of credit cards or retail accounts and loans, such as car and personal loans. Just remember to keep up with the payments to avoid a negative report on your payment history.

  5. 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.

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

What doesn’t affect your credit score? 

  1. Your bank balances: Credit reports list only credit accounts and how you paid them, not savings, checking or investment accounts.

  2. Your spouse’s credit record: Marrying someone with a negative credit record won’t tarnish or affect yours. Every person’s credit reports and scores are separate and individual, unless you open join accounts/loans.

Next steps

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.

You can check your credit report for free every year through one of several Credit Bureaus such as:

  1. TransUnion - 086 148 2482

  2. Experian - 086 110 5665

  3. Xpert Decision Systems (XDS) - 086 112 7334

  4. Compuscan - 086 151 4131

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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'.