South Africans are understandably and inevitably concerned about their level of debt. In fact, South Africans spend up to 75% of their take-home income on settling their debts. However, as a country, over half of all tax-paying citizens struggle to cover their repayment commitments. The South African Reserve Bank reported these figures in 2020; things have only gotten tougher, and more challenging during the pandemic.
Although these may seem like scary statistics, it is important to remember that not all debt is ‘bad debt’. The truth is that South Africans can positively manage their debt to help them improve their credit score. Using existing credit to help build a stronger credit score can transform how we earn and spend money.
Improving your credit score can have life-changing impacts, helping you realise long-term goals, such as buying a home, pursuing further education or starting your own business. On the other hand, defaulting on debt can have serious consequences when applying for credit in the future. Staying up to date and keeping your credit score in the green is critical for all South Africans and easier than you think.
Improving your credit score using your existing credit requires an understanding of how credit scores are calculated and knowing how to manage your debt positively:
Understanding how your credit score is calculated
According to the FICO Scores system used in South Africa, which measures various information related to credit behaviours, pieces of credit data are placed into five categories and calculated to determine the credit score:
- Payment History – 35%
- Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Credit Mix – 10%
Consistency and awareness are the most important aspects of maintaining a positive credit score. Payment history and amounts owed will reflect your credit history, debt accrued, and debt payments covered. Staying on top of these numbers and effectively managing your debts is key to staying in the green.
The length of credit history considers all of your accounts opened and credit started, from the oldest account to the newest. This includes the average lifespan of the accounts you open. New credit looks at your most recently opened accounts and determines your level of credit risk by how many new accounts are being started.
Credit mix is an assessment of the different types of credit you have opened. You have to manage your various credit accounts and debts owed to keep your credit score in the green. However, by reliably covering all your amounts owed and keeping a clean payment history, you can improve your credit score by, simply being responsible with your credit.
Taking steps to improve your credit score
The ability to improve your credit score is within reach. Now that you understand how the FICO model calculates your credit score, you can now start taking positive steps towards improving those numbers:
- Make sure to always pay your debts on time and in full.
- Ensure credit affordability by only taking out credit you need and can afford to pay back.
- Negotiate minimum payment amounts with your creditors and make sure that you respect these agreements, always settling the decided amount on time.
- Calculate your credit utilisation ratio, which refers to the amount of rotating credit you use divided by the total amount of credit you have available. A good ratio is around 30%, and a great ratio is closer to 10%.
If you are starting your credit journey, begin with a small contract you know you can keep, such as a cell phone contract, subscription to a streaming service or your first credit card. Make sure that the cell phone contract or streaming service is within your means if that is your starting step.
If you want to take out a credit card, try setting a cap on available funds to ensure you stay within your affordability boundaries and not the amount you have been qualified to spend. Even if this means building up an emergency fund to pay for unexpected expenses that you do not want to use your new credit card to cover.
The truth is that there is no perfect way to do this. Each South African will have different financial priorities and spending habits that are hard to break. However, by keeping an eye on your utilisation ratio and your credit affordability, as well as paying your credit accounts on time and in full, you can improve your credit score by making positive changes to existing credit behaviours.
Universal Insurance Administrators are at the forefront of South Africa’s insurance and financial risk industry. We provide a diverse range of policies and plans to help ensure that all South Africans and their businesses are covered. For more information about the incredible products and services we offer at Universal Insurance Administrators, contact us today.
