Decoding credit scores to unlock financial freedom for SA’s youth

For today’s youth who are eager to boost employment opportunities, travel, create new experiences, stay on top of the latest tech and embrace new trendsetting fashion, a good credit score is essential. It’s not just a number, but a vital tool that opens doors to achieving these aspirations and enabling young people to finance their dreams and secure a successful future, writes Lerato Thwane, Head of Commerce at Tesserai, a division of Mettus. 

Imagine the thrill of financial freedom where the possibilities of life are no longer just dreams, but tangible realities. Picture yourself landing that dream job, exploring distant lands and immersing yourself in vibrant cultures, savouring exotic cuisines that broaden your horizons, while you confidently showcase the trendiest fashions that make you stand out from the crowd.

While for many these aspirations may seem out of reach due to financial constraints, it doesn’t have to remain an illusion. The key to unlocking these possibilities hinges on a critical yet often overlooked factor – a strong credit score. 

While the term “credit score” may frequently pop up in movies and popular media, its significance can often seem elusive, especially locally. Understanding what a credit score truly represents, including how it’s calculated, its influence on creditworthiness, and its role in shaping financial opportunities, is crucial.

Beyond the numbers and percentages, a good credit score represents trust and reliability, the very traits that open doors and build your path to a successful financial future. For the youth, building a favourable credit score is crucial as it lays the foundation for a stable financial future, empowers them to take charge and turn aspirations into reality.

With the National Credit Regulator (NCR) suggesting that R142.26 billion of new credit was added from July to September 2023¹ and reflective of a strong credit market, South Africans are feeling the brunt of monthly credit payments. So much so that of the 27.46 credit-active population, as much as R2.37 trillion is in debt to registered financial services providers², with many South Africans simply unable to pay back their loans, significantly impacting their credit scores.

While this presents a troubling scenario for many of South Africa’s youth, there are effective strategies to achieve financial freedom and regain control over their financial futures.

Several factors influence your credit score, each contributing to the overall picture of your creditworthiness. Key elements include your payment history, which accounts for a significant portion of your score and reflects your reliability in paying bills on time.

Your credit utilisation ratio, which compares your total credit card balances to your credit limits, also plays a crucial role, while high balances relative to your limits can negatively impact your score. Additionally, the length of your credit history, the types of credit accounts you have, and recent credit inquiries all come into play.

For example, using credit for assets such as a home or education can positively influence your score, as these investments are seen as enhancing your long-term financial stability. In contrast, credit used for consumption, such as retail store accounts, credit card purchases or personal loans for discretionary spending, might not be viewed as favourably. Lenders often consider the purpose of credit to assess your financial responsibility and ability to manage debt effectively, thereby influencing your overall creditworthiness.

Improving your credit score involves a series of strategic steps aimed at demonstrating financial responsibility.

• Pay your bills on time – timely payments are fundamental to a positive credit history.
• Reduce your credit card balances and maintain a low credit utilisation ratio to enhance your score.
• Regularly review your credit report for errors and dispute any inaccuracies to reflect your true creditworthiness.
• Keeping old accounts open and managing a mix of credit types responsibly can further boost your score over time.

By adopting these practices, you can gradually build and maintain a strong credit profile.

This is particularly important when it comes to employment opportunities. This is critical as many employers review credit reports during the hiring process, where a high credit score reflects financial responsibility and reliability, and are traits that are highly valued in potential employees.

Conversely, a low credit score may raise concerns about your ability to manage responsibilities and stress, potentially impacting your chances of securing a job. Employers, particularly those in finance or roles involving sensitive information, often see a strong credit history as an indicator of trustworthiness and good decision-making skills.

For those looking to increase their credit, it is also crucial to consider the repo rate. The repo rate is the interest rate at which the South African Reserve Bank lends money to private banking institutions.

When the repo rate increases, it leads to a rise in the bank’s prime lending rate, or interest rate as we know it, which is the rate charged to customers for borrowing money. This fluctuation directly impacts consumers by increasing the interest rate, resulting in higher borrowing costs.

For example, if you are paying R5,000 per month on a home loan and the interest rate goes up, your monthly payments will increase, making it essential to account for these fluctuations in your financial planning.

Currently, the repo rate remains unchanged, providing consumers with a period of relative stability in borrowing costs and some relief for managing debt.

However, while an unchanged repo rate may avoid immediate increases in interest rates, it also reflects the broader economic conditions and the central bank’s stance on economic stability. Stability in the repo rate can help maintain predictable borrowing costs, but ongoing economic challenges could still strain personal finances and affect credit management.

In a world where financial success hinges on trust and reliability, understanding and improving your credit score is not just advantageous, but essential. While the current economic climate and rising credit reliance pose challenges, a proactive approach to managing your credit can unlock doors to opportunity and stability.

By adopting smart financial habits and staying informed, you can turn your credit score into a powerful tool for achieving your dreams and securing a prosperous future.