Credit Scores: What You Need to Know and Strategies For Improvement

As people are now recovering from the festive season spending and January’s back-to-school rush, it’s time to focus on improving and repairing your credit score. In today’s fast-paced and ever-evolving economic landscape, managing your credit has become more important than ever. Your credit score holds the key to various aspects of your financial life, impacting your ability to secure a loan, rent or purchase a home, and even find a job.

To understand why your credit score matters, one should know how it is calculated. Your credit score is a reflection of your creditworthiness, determined by factors such as your payment history, credit utilisation ratio, length of credit history, and mix of credit accounts. It serves as a predictor of your future financial behaviour and is a decision-making tool for lenders, landlords, and potential employers. Additionally, it allows you to make informed decisions regarding your financial future.

Recent data indicates a rise in the issuance of credit reports, highlighting consumers’ growing awareness of the importance of monitoring their financial standing. By the end of September 2023 (Q3), the number of credit reports issued reached 872,884, reflecting a steady increase from 840,025 in the previous quarter. Of these reports, the majority were free of charge, demonstrating a commitment to financial education and empowerment.

What Steps Can Consumers Take to Improve their Credit Scores?

Lerato Thwane, Head of E-Commerce at Tesserai, explains that making use of a credit score tool holds many benefits for a consumer. It calculates your latest credit scores, groups all open accounts and loans in one place, and displays risk profiles and percentages of debt used and paid back.

To assist consumers to help manage their debt and reduce financial stress and to provide access to up-to-date and free credit information, Splendi, powered by XDS was developed. It offers a credit summary dashboard, detailed segmented breakdowns, alerts and credit education. With a tool like this, consumers can gain valuable insights into their financial health and make informed financial decisions.

Improving your credit score is a gradual process that involves responsible financial habits and careful management of your credit. Thwane provides some steps consumers can take to improve their credit scores:

• Check Your Credit Report: Review your report regularly for inaccuracies, such as incorrect personal information or accounts that don’t belong to you. Dispute any errors you find.
• Pay Bills on Time: Timely payment of bills, including credit cards and loans, are crucial. Late payments on credit accounts can significantly impact your credit score.
• Reduce Credit Card Balances: Aim to keep your credit card balances low relative to your credit limit. High credit card balances can negatively affect your credit score. Ideally, keep your credit utilisation ratio (credit card balances relative to credit limits) below 30%.
• Avoid Opening Too Many New Accounts: Opening multiple new credit accounts within a short period of time can negatively impact your credit score. Only apply for credit when necessary and be cautious about opening too many new accounts.
• Lengthen Your Credit History: The length of your credit history is a factor in your credit score. The longer your credit accounts have been open, the better it is for your score. Avoid closing old credit card accounts, as this can shorten your credit history.
• Diversify Your Credit Mix: Having a mix of different types of credit, such as credit cards, instalment loans, and retail accounts, can positively impact your credit score. However, only take on new credit when necessary and manage it responsibly.
• Be Cautious with Credit Inquiries: Each time you apply for new credit, a hard inquiry is made on your credit report. Too many inquiries in a short time can lower your score. Be selective about applying for new credit and only do so when necessary.
• Work with Creditors: When faced with financial challenges, contact your creditors to discuss your situation. Some creditors may be willing to work with you on a modified payment plan.

Improving your credit score takes time, and there are no quick-fixes. Consistent, responsible financial habits are key to achieving and maintaining a good credit score.