Having a strong credit score is really important when applying for a home loan. Knowing how to improve your credit score improves your chances of home loan approval. It also ensures better home loan terms (read: a better interest rate).
At IGrow Home Loans are here to help you get the best deal possible when you apply for a home loan. Here’s what you can do to make that process go even better!
Table of Contents
- What exactly IS a “credit score”?
- How is a credit score calculated?
- What is the purpose of a credit score?
- Why is a credit score relevant for a home loan application?
- The best way to improve your credit score (in South Africa)
- Keep track of your credit score with handy credit score apps
- IGrow’s top tips on improving your credit score
1. What exactly IS a “credit score”?
If you live in South Africa, your credit score is identified by a three-digit number between 0 – 999. Credit bureaus such as Experian and TransUnion work out this score. This depends on how you manage your credit. The point of a credit score is to show financial lenders or people like letting agents if you repay your debts timeously or not. This lets them know whether you are a good person to loan more money to, or a good potential tenant, for example.
A credit score of 650 + is considered a “good” score. The higher your score, the greater the chance of getting approval for something like a home loan. A “good” credit score will also mean that your home loan terms, such as the interest rate, will be lower. This is amazing news for your future self, as you’ll pay way less in interest over the lifetime of your bond.
2. How is a credit score calculated?
Your credit score starts accumulating from the first instance in which you open a credit account. This could be for a cell-phone contract, a retail shop account, an overdraft facility on your debit card, or a credit card. From this time onwards, your financial behaviour will affect your credit score.
Your payment history, debt owed and the age of your account play a role in your credit score rating. What happens is, credit providers update credit bureaus monthly on your financial movements, and the bureaus will adjust your score concerning this.
3. What is the purpose of a credit score?
Having a good credit score opens lots of doors financially.
Credit scores determine if you qualify for:
- Personal/car/student/home loans
- Cellphone contracts or retail store accounts (e.g. a Woolies store card)
- Funding for your business
- Rental application approvals
- Reduced insurance premiums
- Online shopping credit e.g. Mobicred on Takealot
According to Experian, the South African credit bureau,
4. Why is a credit score relevant for a home loan application?
If you plan to buy a property using financial lenders and banks to finance your home loan, your credit score comes into play. Lenders or banks will check your credit score to assess any risk associated with lending you money to finance your home loan.
This will affect the ease with which you will be able to secure a home loan to be able to buy your dream property! Your credit score gives lenders easy, data-driven insight into how you manage your finances, currently and in the past.
The higher your score is, the more likely it is that:
- Your home loan application will be approved
- You will qualify for a higher home loan amount
- You will be offered a better interest rate as part of your home loan terms.
5. The best way to improve your credit score
Improving your credit score involves building a trusting relationship with financial lenders.
These are the best ways to improve your credit score by adopting better financial habits:
5.1 Pay your bills on time
If you default on payments or you pay bills late, this negative effect can stay on your record for as long as five years. If you are “feeling the pinch”, paying the minimum amount you owe is a better move than making no payment at all.
5.2 Use under 30% of your credit limit
Keeping your credit usage low alerts lenders that you are financially sound. To illustrate this, say your credit card limit is R10,000, it is a wise move not to owe more than R3,000. This is known as “credit utilisation” and makes up 30% of your overall credit score.“A budget using the 50/20/30 approach can help you see the ‘big picture’ and is a useful place to start if you are finding it challenging to allocate a total spend to the categories in your budget. In this rule, 50% of your income goes to necessities, 20% to long-term savings, and 30% to lifestyle choices.” (Source)
5.3 Don’t apply for multiple credit applications all at once
Every credit application you make evokes a “hard inquiry” that affects your credit score, and can even lower your score temporarily. If you apply for multiple credit streams, all at once, this raises a “red flag” in the eyes of lenders as you appear cash strapped. Only apply for credit when you are in dire need of it.
5.4 Check if there are errors in your credit report
Mistakes are always possible. You may have a closed account that reflects as open on your credit record, or even have payment statuses that are inaccurate. Get a free annual credit report from an app such as “ClearScore” or get a report from “My Credit Check.”
Check and challenge incorrect credit reports with the bureaus directly.
5.5 Keep your old accounts open
Even if you aren’t using an outdated clothing account or credit card, keep it open if it is in a good financial state. Your credit history length or duration improves your credit score with time.
5.6 Additional tips for South Africans
There are various ways in which you can improve your credit score within South Africa:
- Register your details on the Electoral Roll: this confirms your primary address and identity.
- Report your rental payments: Apps such as RentTrack or ClearScore allow you to record regular and up-to-date rent payments to benefit your credit profile. This shows you pay your rent on time.
7. Tracking your credit score with handy credit score apps
ClearScore is a popular credit score tracking app in South Africa, and it’s free (though there are some in-app purchase options). It pulls your data and credit score information from Experian, updating it on a monthly basis.
The ClearScore app offers you:
- A breakdown of your score and what is affecting it
- A user-friendly dashboard to track your credit score progress
- Tips on how to improve your credit score
- Tracking of your payment history and alerting you of any defaulted payments that are kept on your record
You can download the app on the Apple App Store or Google Play, or by going to the ClearScore sign-up page.
7. IGrow’s top tips on improving your credit score
The IGrow Home Loans team have helped thousands of investors qualify for a home loan and purchase their dream home.
IGrow’s Home Loan Department’s top tips to improve your credit score include
- Check your credit score 6 months ahead of time, when you aim to apply for a home loan. Make sure it’s reflecting as a “good score” and if not, apply some of the advice above to improve your score.
- Make use of budgeting apps so you avoid missing payments.
- Aim to reduce your credit card amount usage and if you have any retail account balances using considerable credit.
- Don’t open new accounts near the time when you aim to apply for your home loan.
- Track your credit score’s positive improvements through an app such as ClearScore.
- Ask our IGrow Home Loans team to do a financial assessment for your pre-qualification for a home loan. We will offer you feedback on weak areas affecting your credit score.
Conclusion
If you understand how to improve your credit score, this is the first step on your journey to financial empowerment and purchasing property.
By improving your money habit and checking in on your credit score frequently, you’re on the right path! Take charge of your credit score journey today! We look forward to chatting with you soon to secure the best financing for your property investment.
