If you wish to apply for finance or credit, apply for certain jobs or rent a house, your credit rating will be important

A number of credit bureaus in South Africa gather information on consumers’ financial habits and conduct.

When financial institutions are considering a prospective customer’s risk profile, they will use this information from the bureaus to determine whether or not to grant the customer credit.

What is a credit score?

The credit report contains a comprehensive history of your credit behaviour and how you manage your debts. The bureaus use a mathematical formula to convert this collection of data into a number which is called your credit score and it will appear at the very top of your credit report.

It is a statistical representation of your creditworthiness and how well, or poorly, you handle your debt responsibilities.

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It is a statistical representation of your creditworthiness and how well, or poorly, you handle your debt responsibilities.

The different credit bureaus do not all receive identical information from all credit providers and they all use slightly different formulas so their score will not be identical. The might also update their information at different times.

They all work on the same basic principles, however, and all look at the same factors.

How is your credit score calculated?

While the bureaus do not reveal the exact complex formula that they use, we do know the factors that determine your score.

One of the main things they will look at is how you have conducted your current as well as past debts, and your payment history. Any instalment that has been missed, short paid or late will count against you, lowering your score.

Accounts that are not paid for a period of time, without arrangements being made, become defaults. If they remain unpaid, the creditor will eventually take legal action that will, unless successfully defended, result in a judgment. Defaults, and particularly administration orders and judgments, will seriously reduce your overall score.

Total outstanding debt

They will also look at the number of accounts and the total amount of debt that is outstanding. If all available credit is used to its maximum, this will count against you. Having a number of dormant accounts that are never used will also reduce your credit score.

Another thing that will reduce your credit score is too many credit inquiries too often. If you apply for credit numerous times in a short period of time, it will reduce your credit score.

Account history

By the same token, accounts that are paid correctly and on time every month will increase your score. The amount of time the account has been paid correctly, the better your score will be. The length of the account history will impact your score.

Things such as race, religion, marital status and national origin do not affect your credit score in any way.

Another factor in calculating your score is stability. The longer you have worked for your current employer and the longer you have lived at your current address, the better your score will be. Frequent job changes or address changes will have a negative impact on your score.

Factors that do not affect your credit score

Your income has no bearing on your credit score. It will obviously affect your affordability for finance or credit but has no impact on your score.

Things such as race, religion, marital status and national origin do not affect your credit score in any way.

Applying this knowledge

Now that you understand how your score is calculated, you will be in a better position to maintain a good score or improve a low score.