Have you ever been denied credit by a lending institution? Was your credit card application rejected? If so, you probably have a low credit score. These days, banks and other credit providers make all of their lending decisions based on your credit score. During the past few years, cell phone companies and insurance providers have started using credit scores in their decision making process. Consequently, a low credit score can negatively affect your lifestyle.
Fortunately, there are steps you can take to improve your credit score. Let’s examine the details.
Many people are not even aware of their low credit score because they never make an effort to monitor their credit report. Therefore, the first step is to obtain a copy of your credit report
from a credit bureau. There are four major credit bureaus in South Africa: Compuscan, Experian, TransUnion and XDS. You are entitled to a free copy of your credit report every 12 months.
Examine Your Credit Report
By examining your credit report, you can accurately determine why you have a low credit score. The report will list any late payments for the past two years. Perhaps you made a late payment on your auto loan, credit card or bank loan. These late payments will definitely lower your credit score. Additional items which could affect your score include excessive credit enquiries, court judgement, debt restructuring or enforcement action.
After you have examined your credit report, the next step is to determine your actual credit score. Contrary to popular belief, a credit report from one of major credit bureaus does not contain your credit score. The best way to secure a copy of your score is to contact a credit monitoring service. There are several of these companies available in South Africa. A few of the more popular monitoring services include ClearScore, Credit Health and creditreportsa.
Your credit score can range between 330 and 850. Any score above 750 is considered an excellent score. If your score is below 680, this is considered a poor score. Most likely, you will have a very difficult time securing a loan with a score below 680.
Follow These Steps to Improve Your Score
The most important step in improving your poor credit score, is to develop a plan of action. Unfortunately, a poor credit score won’t magically disappear. In fact, the score will probably continue to drop if you ignore the problem.
The number one reason why consumers have poor credit scores is because of late payments. All late payments are reported to the major credit bureaus. These late payments will be attached to your credit report for two years, which means this information will negatively affect your score for a long time. Of course, each time you have another late payment, the
two-year waiting period starts all over again.
Fortunately, late payments can easily be avoided if you have the discipline to make a few changes in your financial life. The best way to stop this viscous cycle is to establish an automatic payment with your bank or financial institution. For example, if you have a credit card payment, your bank can automatically make the payment by transferring funds from your bank account to the credit card company. These electronic transfers can be established for all of your monthly payments. This is a perfect solution for preventing late payments.
Ironically, most consumers with a history of late payments actually have the funds to make their payments. They simply lack the discipline to make the payments on time. By following a few simple steps, you can break the habit of late payments.
If you simply don’t have the necessary funds to make your loan payment, the best course of action is to contact your lender. Ask the lender for a loan extension. The majority of banks and lending institutions are willing to help if you are experiencing financial difficulties. In fact, many banks will renegotiate your loan with a more favorable interest rate and a lower monthly payment.
This course of action won’t improve your credit score. However, it will definitely prevent your score from becoming worse. For example, if you ignore an overdue loan payment, your credit score will deteriorate rather quickly. By working with your bank to make the payment, your score will suffer much less damage. Always remember, the worst mistake you can make is to ignore an overdue loan payment.
In addition to late payments, another cause of a poor credit score is excessive credit enquiries. Each time you apply for a loan or complete a credit card application, the lender will request a copy of your credit report. This is known as a credit enquiry. Excessive enquiries will definitely lower your credit score. The simple solution to this problem is to avoid submitting credit applications. Don’t apply for a bank loan or request a new credit card unless it’s absolutely necessary. This is a very easy way to improve your overall score. Additionally, it will prevent you from accumulating an excessive amount of debt.
If you are searching for additional ways to raise your credit score, you should determine the amount of your credit card debt. Consumers who carry large credit card balances typically have a low credit score. Why? Because it reduces the amount of their revolving credit. Your overall credit score is penalised if the majority of your revolving credit has been exhausted.
What is revolving credit? This is the type of credit that can be used repeatedly as long as the account remains in good standing. The most common type of revolving credit is a credit card. Each credit card has a predetermined spending limit. You are allowed to repeatedly use the available credit on your card provided that you maintain the account by making all payments in a timely fashion.
Revolving credit will not negatively affect your credit score as long as you maintain a relatively low balance. However, consumers who “max out” their credit cards will definitely notice a reduction in their overall score. Therefore, an easy solution is to make an effort to dramatically reduce (or eliminate) your card balances. As the amount of your revolving credit begins to increase, you will notice a similar increase in your credit score.
Raising your credit score is a marathon, not a sprint. Therefore, the single best advice for improving your score is to learn how to manage your finances over time. Make a conscious decision to change your financial lifestyle. In the long run, you will be very pleased with the results.
Checklist for Improving a Poor Credit Score
Order a copy of your credit report in order to discover the source of your low score
Obtain your credit score through a credit monitoring service
The number one reason for a low credit score is late payments on loans and credit cards
Late payments will remain on your credit report for two years
Late payments can be avoided by establishing automatic transfers with your bank
Excessive credit enquiries will lower your credit score
Eliminate excessive enquiries by reducing credit card applications and bank loans
Consumers who carry large credit card balances will most likely have a low credit score
Increase your credit score by reducing your credit card balances
Achieve long-term success by making a decision to change your financial lifestyle