•  Let’s face it: we all want to live a life free of debt, but the reality is that most of us are in some sort of debt.
• And for many of us, it’s a lifetime condition because of long-term loans such as home loans.
• The trouble is, very few of us have the cash for bigger items such as properties, cars, and other big expenses.

So, because we want something sooner rather than later, we borrow money to allow us to have something before we’re really able to afford it. Then, the reality of paying back the money becomes all too real when it takes a chunk out of your salary.

And for some expenses, like a house, you’re likely to be paying instalments for up to 24 years, with payments and interest rates varying according to the decisions of the Reserve Bank.

The riskiest credit of all

Not all credit is created equal. Obviously, the riskiest credit to secure is a loan from a money lender or ‘loan shark’. They are not registered with any regulatory authority, so you are not protected from shady practices.

They also usually charge extortionate interest rates, so that you might end up paying back double or even four times what your original loan was. And if you fail to pay up on time, you might find yourself facing more than a nasty letter. If you want to take a loan, there are reputable lenders such as banks, retailers and loan providers that are a far safer bet than a loan shark.

Before you start looking for someone to lend you money, you should find out your credit score.

The key: your credit score

Your credit score is a number ranging from 330 to 850 and is calculated on the basis of your credit profile.

It represents a kind of summary of the financial decisions you have made and tells a potential lender such as a bank, department store or loan company whether or not it would be a good idea to lend you money. It’s a reflection of how much risk a lender will take if they lend you money.

The higher your credit score, the less risk you are to creditors. The closer you get to 850, the better your chances of getting good rates and special deals. But if your score is closer to 330, you’re likely to attract higher interest rates if you manage to secure credit at all.

Calculating your credit score

Credit bureaux calculate a person’s credit score based on how much debt you have, how you pay your bills, and how you compare to other consumers. Bureaux differ in how they make these calculations as they take different kinds of information into account. Some companies offer online credit score calculators.

What affects your credit score?

From the time you started transacting financially, you started building a financial history. Your credit score is influenced by:

• Missing payments. If you don’t pay your accounts on time or miss a payment, your credit score will be affected.
• Blacklisting/having a judgement taken out against you.
• A lot of debt. The more you owe, the less you can afford to pay back.
• The length of your credit history. Young people, especially, who might not have made many significant financial transactions, find it harder to secure credit than those with a longer credit history.
• Accounts you’ve applied for. The number of credit applications you’ve made and how many new accounts you have opened impact upon your credit score.

What’s a good credit score in South Africa?

South African regulations have become a lot more stringent over recent years so that creditors are looking for high credit scores before they lend money. In the past, a score of 680 was considered very good, but now it’s viewed as average. Generally, a score of 720 or above is seen favourably by creditors.

How to improve your credit score

If your credit score is not as high as you’d like and might prevent you from securing credit, there are things you can do to improve it such as automating monthly payments, paying your accounts on time, and closing unused accounts.