How to fix a bad credit score

Have you started the home loan application process only to find out that your credit score is low? You are not alone. In the homebuying journey, understanding what makes a good and bad credit score and making the necessary adjustments to improve your score is the first step to being accepted for a home loan – and at the best interest rate.

What is a credit score?

Your credit score – a three digit number – is calculated using several factors such as how much debt you have, how long you've been taking credit out and the types of credit accounts you have in your name. Credit bureaus collect and compile this information to generate your credit score, which allows lenders to understand the risk they are taking by giving you credit. In short, your credit score is a record of your credit history, which tells lenders how well you have managed your credit in the past.

Regularly check your credit score

It’s important to remember that you are entitled to one free credit check from any credit bureau every year. If you check your credit score regularly you can see where you need to improve. You can also check if there are any errors in the system. It’s not uncommon for credit bureaus and lenders to make mistakes on your credit history. Keeping track of your score will help you sort any errors out quickly and long before you need to apply for a home loan or other credit. It’s all about being proactive instead of reactive.

Get rid of overdue accounts as soon as possible

If you start making payments on an overdue account, or pay it off entirely, it will still reflect positively on your credit history. However, overdue accounts can stay on your records for up to five years even if you close the account after paying it off.

Manage your debt

Make a list of all your credit card and account debts. Check in with all your lenders to see how much interest you are paying on each account. Then start paying more into the accounts with the highest interest rates and try to pay them off sooner. You don’t need to close your account, rather focus on getting it paid off faster so that when you apply for a home loan, you have greater affordability.

Don’t “credit shop”

Opening multiple credit accounts at the same time is called credit shopping. This can have a negative effect on your credit score. Another big no-no is pay day loans – opening accounts or taking out short-term loans shortly after being paid. Financial institutions are unlikely to approve a home loan if there is a history of these types of loans.

Keep tabs on your credit utilisation rate

Your credit utilisation rate will tell lenders how well you are managing your money. Your aim is to keep your credit utilisation rate between 0% and 30%. To calculate this rate, you divide your unpaid balances by your credit card limits on all your cards. Let’s say you have two credit cards, each with a R5 000 limit. If you’ve used R2 000 on each card, you can calculate your rate as follows:

R2 000 plus R2 000 = R4 000 (unpaid balances) divided by

R5 000 plus R5 000 = R10 000 (credit card limits)

= 40% credit utilisation rate

Make sure you pay your accounts on time

If you are a busy person and battle to make sure your debt repayments are done on time, you should consider switching to debit orders or scheduled payments. Late account payments also reflect badly on your credit score.

Avoid maxing out your credit cards

If you regularly max out your credit cards – in other words, spend over your credit limit – it will also negatively affect your credit score. It shows credit bureaus that you rely on your credit regularly, perhaps too much. It also shows that you are not in control of your finances.

Don’t be scared to approach your lenders if you are struggling

If you are battling to pay your debts, there is no harm in approaching your lenders to work out a payment plan. Most lenders will help you because you have shown the initiative to try and fix the problem. They may even consider lowering your interest rate. Once you have set up a payment plan, you must stick to it. Defaulting from a payment plan will reflect badly on your credit score.

Betterbond is here to help

If your credit score is not too bad, you can improve it in a short period of time. If, however, your credit score is very low, it could take months (or even years) and dedication to improve your score. BetterBond can help you with this if you need expert advice.

If you can work on improving your credit score before you start the process of applying for a home loan, you can rest assured that you will get the best interest rate for your dream home. Make no mistake, even a 0.5% saving on your interest rate can save you thousands of rands over the period of your loan repayments. Get started today, for a better financial future for you and your family.