Is your Credit Score Costing You in Interest Payments?

Knowing your Credit Score is a vital part of understanding your financial fitness – whether you’re planning a big-ticket purchase, like buying a home or a car, or simply looking to open a new clothing or cellphone account. Your Credit Score is a three-digit number that gives a credit provider an indication of your creditworthiness, and may inform their decision on granting you credit.

It is informed by a number of factors, including how and when you pay your bills; how much debt you’re liable for and how your credit behaviour stacks up against that of other borrowers. A TransUnion Consumer Credit Score ranges from 0 to 999, with numbers upwards of 614 rated ‘Favourable’, Good’ or ‘Excellent’ and downwards rated ‘Average’, ‘Below Average’, ‘Unfavourable’ or ‘Poor’.

While it’s not the sole factor taken into account by credit providers – they may also take into account your employment history; your income and affordability assessment; and the type of credit that you’re applying for - your Credit Score may play a role in determining the interest rate you receive on a loan or the spending limit on your credit card or clothing account.

This is especially relevant when negotiating the interest rate on big ticket credit items such as vehicle finance or a home loan, where a few percent difference can cost you thousands every month. For example an additional 1% above the current prime lending rate for a R1.5 million home loan taken over 20 years, will cost you approximately R1 000 extra each month or more than R240 000 over the lifetime of the loan.

Typically, the higher your Credit Score, the better you will be able to negotiate on your interest rate.

Your Credit Score is also an indication of the strengths and weaknesses of the information contained in your Credit Report.

If your Credit Score isn’t where you think it should be, it’s important to review the information contained in your Credit Report to ensure that it is accurate. This also helps to safeguard against identity theft, which can have dramatic consequences both over the near- and long-term.

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If the information contained in your Credit Report is accurate but you’re unhappy with your Credit Score, what can you do about it?

In terms of improving your Credit Score and generating a more favourable credit report, consider these factors:

• Account payment history: In other words, how you manage your accounts and whether you manage to pay the required instalment amount, on time, every month. Your credit report will show which of your accounts you could be paying better attention to. Make sure you pay the full instalment due, timeously, to improve your score.
• Your level of debt: This refers to how much you owe on credit and how much of your available credit you’re using. To improve your credit score, you should ideally be looking at trying to use less than 35% of the credit limit available to you.
• Negative information: If you’ve had a judgment against you for not meeting your debt obligation, your Credit Score will be negatively affected. The good news is that you can rectify this by checking your credit report and paying those outstanding debts in full, to have that negative information removed and improve your score.
• Length of credit history: this refers to how long each of your credit accounts has been open. Maintaining a healthy mix of credit (from store accounts and cellphone accounts, to home loans) over a sustained period will establish a strong, positive credit history – something a potential lender will appreciate.
• Account application and enquiry activity: Credit bureaus track how often you apply for credit and how many new accounts you’ve opened, which can have an impact on your score from a suitability standpoint. When shopping around for credit, remember that there’s a difference between active (vehicle loans) and passive (clothing accounts) enquiries, which can negatively affect your score, as can a host of simultaneous applications, which could indicate a change in your financial circumstances.
• Identity theft: Check your credit report and Credit Score regularly and keep an eye out for anything that doesn’t look right – a line of credit you may not have applied for, or a judgment against you for an account you never opened. Contact TransUnion to highlight inaccuracies, which can be investigated and corrected.

While there’s no guarantee that a particular Credit Score will ensure that you get approved for credit or a favourable interest rate, there are no negative effects to ensuring that your Credit Score is healthy.

You can download your Credit Report once a year for free from TransUnion – and add insight into your Credit Score for R80.