What affects your credit score?
11 AUGUST 2023
Keeping a good credit score is not always an easy feat.To help you reach your optimal credit score, avoid the factors that negatively affect your credit. Read further to understand these factors so you can apply for the best interest rates for you and a few tips on how to build a good credit score.
Top factors that can affect your credit score
Applying for credit
When you apply for a loan or a credit, lenders and credit providers conduct a hard enquiry to look at your credit report. This is also known as a credit “pull”, to get access to your credit report and assess your risk level. This action can negatively affect your credit score for a short time. Avoid applying to too many loans or credit accounts at the same time. Applying for many loans at the same time is known as “credit shopping” and can also harm your chances of getting approved.
The age of your accounts
Your credit score is calculated by looking at your payment history and how you manage your credit accounts. This means that having an older credit account shows that you are trusted by another lender on a long-term basis. It shows that you can keep up with positive credit behaviour for a long period. Apply for small credit accounts to help you build a good payment history when you can.
Missing a payment or defaulting
Missing monthly payments negatively affect your credit score as they show up in your payment history. This is an important factor when calculating your credit score, as you need to show that you are responsible for your loan repayments. Defaulting on a loan happens when you miss a certain amount of payments and depends on what your lender stipulates as defaulting. This has a bigger negative impact on your credit score than missing one payment, as it stays on your credit report for about 5 years.
Your credit utilization
How much available credit you’re using can affect your credit score. You should be keeping your credit repayments to between 20% - 30% of your income. This also means that if you have one credit card with a higher credit limit, you show that you’re trusted with that kind of credit.
Your public records
Negative events on your public records like court judgements, admin orders or a sequestrian order, becomes part of your credit report, and thus affects your credit score. This is because events like these show that you have had some sort of legal financial action taken against you. Lenders would be reluctant to lend to you as your credit score will be impacted.
Having no credit history
To have a credit score, you need to have evidence of having a credit payment history. You need to have active credit accounts, at least one to make routine monthly payments into.
Different types of credit
There are different types of credit available to you, and fully understanding how each one works and how they can benefit you will help you avoid making negative decisions regarding your credit. Educate yourself on what type of credit you need depending on your situation.
Tips to build a good credit score
- Apply for a credit card or loan with your bank or a store card like RCS, to help you manage easy monthly payments.
- Get a co-signer on a loan or credit account and work together to build a good credit score.
- Keep a mix of unsecured credit, like credit cards and personal loans, and secured credit, like mortgages and car loans.
- Regularly monitor your credit report so you can keep an eye on negative events and avoid missing legal action notices.
- Pay your full monthly instalments on time, either by setting up a payment schedule or debit order.
- Avoid applying to too many unsecured loans, or too many credit accounts as it can affect your credit score.
- When you can afford to, pay off your loans instead of never paying the debt back. This will help you avoid paying extra interest fees that you can avoid.
Check out our other informative articles on how you can maintain a good credit score and give you the best chances to get approved for credit or loans suited to your situation.