Your credit rating and why it's important when purchasing a home
Many South African home buyers are unaware of the significant role a credit score plays in determining a lender's decision to approve a bond, the bond terms or the amount being approved.
Most buyers rely on online bond calculators to gauge how much they can afford. However, these online bond calculators don't include your credit score - critical assessment criteria - into the equation, which could give you an incomplete view of the kind of bond a lender will approve.
On the other hand, lenders are very interested in how much risk a client could have and use your credit rating to assess whether or not you're a risky choice.
Then, they use that data to approve and structure the loan.
Therefore, you should pay close attention to your credit rating because lenders will.
What is a Credit Rating?
Your credit rating is a three-digit figure that shows lenders your creditworthiness. It summarises your risk profile to lenders, who use it to determine:
- Whether or not to lend to you.
- How much they can lend.
- What interest rate they should apply to the loan terms.
Essentially your credit rating is integral in deciding how much home you can buy and how much your repayments will be.
Keep in mind it will be easier to get better repayment terms at the start of the process than attempt to retroactively change your lending rates with a lender, even if you've built up your credit rating down the line.
How to Check Your Credit Rating?
Knowing your credit score gives you a launching pad you can use to improve your credit rating.
Every credit-active adult in South Africa is entitled to conduct at least one free credit check on themselves a year. They can access that credit report through the credit bureaus lenders use to assess your creditworthiness.
To check your credit score, you can contact one of the four major credit bureaus: Experian, Transunion, Compuscan (which has been acquired by Experian), and Xpert Decision System (XDS), and request a free credit report.
Alternatively, you can complete the process online and gain free access to your credit score anytime through Experian's My Credit Expert.
To get unlimited free credit reports, visit My Credit Expert, select "Sign me up 1-2-3", and enter the details they request of you.
Note: The My Credit Expert database only accesses credit reports from Experian.
Five Ways to Improve Your Credit Rating
After you've accessed your credit report, don't be discouraged by any adverse reporting. There are relatively straightforward ways to improve your rating and report, which we detail in the following five tips.
Focus on Acquiring Good Credit
Home loan providers are very interested in the type of credit you have. Good credit would be considered a car loan, credit card, or secured credit facilities. Bad credit would be store cards, store credit, and unsecured loans.
Avoid bad credit and stick to applying for good credit facilities.
Pay Your Bills On Time
Lenders can report you for late payment a day after the payment is due. Unfortunately, most lenders aren't as quick to report the bill being up-to-date, leaving a late payment strike on your credit report for months after it's been resolved unless you dispute it with the credit bureaus.
Avoid the headache of having to dispute every months-old late payment charge and the knock-on effect it has on your credit rating by paying your bills on time.
Only Use 30 Percent of Your Credit Utilisation
Credit utilisation is the amount of credit you have available and how much of it remains outstanding.
For example, if all your available credit from various providers amounts to R100,000 and you still owe R80,000, your credit utilisation is 80%. Ideally, you want to keep the figure below or as close to 30 per cent as possible.
Keep Old Accounts Open and in Good Standing
Home loan providers are very interested in your credit history. The longer, the better.
Therefore, keep old accounts open and up-to-date rather than close old good credit accounts.
There isn't any significant cost associated with having them open and fully paid, and it shows lenders you have remained creditworthy for years.
Don't Take Out New Lines of Credit While Applying For a Home Loan
If you're planning to apply for a home loan, you should cease applying for other lines of credit, ideally one year before applying but at the very least six months before applying.
Every time you open a new line of credit, your credit score takes a hit, as both running the report and adding to your credit utilisation deduct from your credit score.
Bonus Tip: Bring Your Accounts into Good Standing
If you have any arrears focus on paying that off in the months preceding your home loan application.
Then, contact each credit bureau to ensure their databases reflect that you're in good standing.
Once your credit rating reflects that you're a low-risk borrower, now is the time to approach a lender and real estate agent to get the ball rolling on purchasing a home.
16 Feb 2023
Author Coastal Property Group