Negociate Credit Solutions - Lauren Heekes
In Part 1 of this series http://bit.ly/2IDfVRz we discussed what credit scores mean and how to improve them. In Part 2 we will be discussing how these percentages are allocated to make up this score.
How is the percentage allocated?
While the percentage can be allocated slightly differently by each Credit Bureau the following basically applies:
1. Payment history (35% of score):
Do you pay your instalment due on time? Do you pay your full installment, the minimum or somewhere in between?
• Do you pay on time – This means on or before the Credit Provider's due date.
• Do you pay the full installment – if you pay less than the full instalment that is due on your statement, this will result in your credit score being reduced.
• The minimum instalment – This applies to credit cards or credit facilities. While the minimum instalment is listed with the Credit Bureaus, paying the full instalment due will definitely improve your credit score.
2. How much of the Credit Limit do you use? Credit utilisation (30% of score).
Try to use only 30% of the total credit granted on revolving credit facilities. Credit facilities include credit cards, Revolving Credit Loans, overdrafts and clothing accounts.
• If you exceed the credit limit – This will reflect negatively on your Credit Report. You will be viewed as a high risk lender.
• If you use less than 30% of your credit limit – This will reflect positively in your Credit Score and you will be regarded as a responsible lender.
E.g. If the Credit Limit on your clothing account is R10,000 you should try to keep the amount of credit you use (credit utilisation) to R3,000. If for whatever reason you need to use more than 30%, make sure you have a budget plan in place to reduce this back to R3,000 as soon as possible.
3. Length of Credit History (15%):
• New Account – A new account application will actually reduce your Credit Score by 5 points initially. After 3-6 months and once points 1 and 2 are applied the Credit Score will improve again.
• Old Accounts – will improve your score if points 1 and 2 have been applied throughout the use of the account. The longer you have an account, the better.
• Closed Account – Personal and Micro Loans will close after the term granted is completed. They do not carry as much weight as Credit Facilities. Therefore Credit Facilities like Credit Cards and Clothing Accounts will gain more points even when there is a zero balance, because the account is still open. Again points 1 and 2 will also apply in this regard.
4. Credit mix (10% of score): Mix it up by combining different accounts.
• Credit Facilities - Credit Cards, Clothing Accounts and Revolving Credit Plans.
• Unsecured Loans – Micro Loans, Short Term Loans and Personal loans.
• Asset based loans referred to as Secured loans - Vehicle and Home Loans.
You must however be in a position to afford them all. One facility in each category will do. Don’t go crazy and have many in each category. This will be viewed negatively.
5. New credit (10% of score):
It’s OK to occasionally open a new account, but if you are applying for several accounts in a short period of time you will lose points.
Try not to apply to numerous Credit Providers within a short space of time. If you exceed 3 enquiries in 7 days there is an alert placed on your Credit Report.
It is very important to remember that the damage to your credit score diminishes over time as long as you actively make an effort to rectify negative information.
You are not going to lose nearly as many points if you are late with one payment as you will if you are delinquent for several months.
Late payment history remains on your credit report for 24 months. i.e. if you are currently 9 months in arrears with repayments it will take 9+24 months to rectify your payment history. i.e. 33 months in total.
The less negative information you have on your report – late payments, maxed out credit cards, constant credit applications, etc. – the easier it is to repair your credit score.
Don't forget to read other related articles:
Part 1 - How do I improve my credit score - http://bit.ly/2IDfVRz
About Our Author
Lauren is a currently a registered member of the National Credit Regulator. Prior to that, she worked as a Financial and Technical consultant for McGregor-BFA (Now INET-BFA). McGregor-BFA provided Financial Advice, Trading and Market related data as well as Investment management software to various Asset Managers, University Business Schools and Investment entities. Thereafter experience was advanced to the Property Market working as a Project Manager for Propertyi. But it was actually her career at the IEB, in Adult Education, that inspired a passion of hers to educate consumers about responsible ways of managing their financial lives and the long term advantages of this. It is her belief that financial education should be taught from an early age. By doing so we can create a country that is truly economically stable. An economy of consumers that are driven, not only by work ethics because they understand the concepts of money, but also to becoming Financially Independent.
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