Personal finance: What you need to learn about your credit score

Whether you are young or old, there are several essential points you need to know to understand your credit score.

Young adults in particular often don’t know enough about topics like taxes, credit ratings and investments.

However, a good rating is essential when buying a car, house, furniture or anything on credit.

How a credit score works

You need a good credit score before you apply to buy an item on credit. The store you are buying the item from will do a credit check on you.

A credit rating is a way of showing the store or vendor how likely you are to pay your bills. If you have a high score you are seen as more trustworthy, as it means you are more likely to be able to pay them back.

However, if your score is lower, then you are seen as more of a risk.

Therefore this is something you need to work on before making your credit purchase. However, this process is gradual and may take months or years to build up.

What credit bureaux do

There are four main credit bureaux in South Africa that offer one free annual credit check per person. These are Transunion, Compuscan, Experian and Xpert decision systems.

Each bureau is able to give you your credit score. According to Clear Score, these are the credit score ratings:

• 0-527: Very poor
• 528-602: Poor
• 603-649: Fair
• 650-669: Good
• 670-705: Excellent

How to build your credit score

If you are a young adult, you have to build up your credit points. Here are a few things to take into consideration when attempting to do so.

1. Store account

Opening a store account with a retailer can help you build up your credit score. Preferably choose a store that will send your information to the credit bureau. Read the terms and conditions before you sign however.

Then, buy something small and pay it off over a few months even if you have the means to purchase the product cash. You can, however, pay slightly more than what you are owing each month.

It is important to make sure you do not miss any payments or pay late because this will affect your credit score. Also, when you have paid off the account, keep the account open instead of closing it.

2. Credit card

A credit card may help improve your score if you are consistent with payments. If you don’t have a credit history potential lenders will not be able to see what your borrowing behaviour is like.

If you’re sceptical about spending wildly on your credit card, you are wise. A credit card can be a huge temptation so you need to make sure you are disciplined enough before getting one. Do not buy items you do not need, and never go over your budget.

3. Court judgments

Court judgments may damage your credit score. A negative judgment stays on your credit record for up to five years.

4. Credit enquiries

Multiple credit applications can damage your credit score because this may show that you are reliant on credit.

5. Defaults

Defaults such as paying late may have a negative impact on your credit score. Therefore it is important to pay your accounts on time and in full. You can set up debit orders to help. Ask your bank for assistance on how to do this.