Credit Scores for Dummies (and students)

Credit score is a concept which is shrouded in mystery. Yet the power of these 3 numbers seems to be one of the greatest influences when it comes your financial health. However, for most of us, by the time we start recognising the power of these mysteries numbers, it might be too late. 

What does a credit score indicate? 

Having a good credit score means the Credit Bureau, (think of them like the adult “Money Santa Clause” that tells the bank how you manage your finances) is happy with you. When Money Santa is happy with you, he tells important people (like banks or car dealerships) you are the type of person that gives back the things you take – like you said you would. Unfortunately, Money Santa has been lied to a couple of times, so he is extremely sceptical. Without proof that you are an honest person, he assumes you aren’t.  

Having a good credit score is like proving to Money Santa that you do what you say you will do. 

What are the benefits of a good credit score? 

This comes with a plethora of benefits, such as better interest rates for loans, credit cards, and smaller car repayments. Usually when you have a lower credit score, “Money Santa Clause” can’t wait to tell the bank or car dealership that you are a “more risky” investment. (that guy doesn’t just trust anyone) 

Remember, the bank lending you money, in the form of a loan or car payment, is a way they “invest” money. The riskier the investment, the more compensation they want for their potential loss.  

How do you get a better credit score in South Africa? 

Unless your credit score is 800+ it won’t hurt to try increasing your credit score. The first step is to: 

  1. Pay off your Debt. 

While this seems obvious, as the primary thing Money Santa looks at is how well you do what you say you will do – financially. Primarily when you say you will pay people back, do you pay them back?  

“Do my buddies let Money Santa know I paid them back for that from beer last week Saturday” Some people may enquire. Unfortunately, “Money Santa” only talks to people who pay him for his opinion, like banks, car dealerships and mobile phone dealerships, etc.  

If you are in a position where you need to pay banks back, (yes this includes your student loan) your first priority should to make your payments on time. If you can’t afford the payment scheme you first agreed to, go talk to your bank about restructuring your payments. 

  1. If you don’t have debt – create some. 

Not all young people have come into a position where they need use “credit.” Because of some people might manage their money well throughout their 20’s; some people find themselves in a position where they don’t qualify for home or car loans when they are 30. There problem is, despite using their money well, they never borrowed anything from anyone, so Money Santa doesn’t know whether or not they will give the money they want to borrow – back.  

 Money Santa’s “rules” for utilising debt.  

Start small 

When finding out about building a credit score, the temptation is to go out and create accounts at all your favourite clothing stores. This is not the answer. Start with a single account, and use it appropriately (more on that later.) If you create to much debt to quickly, you might convince Money Santa that you depend on debt. This decreases your credit score. 

Only use 30% 

75% of the average South African’s salary goes to paying off debt. Needless to say, this debt-to-income ratio doesn’t make Money Santa very happy. When you are start utilising debt, ensure you don’t use more than 30%. Some people suggest that 10% is better for boosting your score. 

 Although for most students, only using 10% of their income to pay off debt means they can only buy a packet of two-minute noodles using debt. (Okay, okay, okay maybe not exactly)  

Consider an overdraft account 

The details of what an overdraft account entails differs from bank to bank. Although, all bank can agree, that if you want an easy way to start boosting your credit score off a student budget, an overdraft account is a great way to start. 

How an overdraft account works, is if your account hits 0, you have access to “more money.” This doesn’t mean you can go to “Klein Saterdag” at the end of the month, because it is more expensive in terms of interest.  

The overdraft account was invented for people who have monthly bills going off their account on the 25th and only get paid on the 1st. With an overdraft account, there is grace to continue to pay your bills on time.  

If you want to continue not living pay check to pay check, yet use your overdraft account, put your extra income in a saving account, dip your toes into the overdraft for a day or two, and top up with your saving account.  

For more details on the benefits and exactly how to apply, visit your nearest bank and talk to the friendly tellers.  

Have you looked at a credit card 

Once you have used your overdraft account sufficiently, it’s time to upgrade to the credit card. A credit card is similar to an overdraft account, expect, the whole account acts like your overdraft when it hits zero and usually there is a period of grace where you don’t pay interest. This doesn’t exist with most overdraft accounts.  

However, similar to the overdraft account, ask your local bank for detail specific to your situation. 

Building a good credit score takes time, but it well worth the effort. Time is on your side. You are likely going to purchase most of these things anyways. Buying things in a way Money Santa approves, ie. Utilising debt in a responsible way.  

*As always, we highly recommend consulting a certified financial advisor or financial planner who is qualified to look at your unique situation. All the points above are factual and opinions, none of which should be taken as advice.*