using-credit-to-improve-your-credit-score Using credit to improve your credit score

As a country, we spend about 75% of our take-home pay on settling debt – yet almost half of us still struggle to meet our repayment commitments. These figures from a 2020 South African Reserve Bank report paint a foreboding picture. What’s important to bear in mind is that not all debt is bad. You can positively manage debt to build a strong credit score which, in turn, can be life-changing.

According to Ayanda Ndimande, Strategic Business Development Manager: Retail Credit at Sanlam, credit can empower you to realise a goal like purchasing a home, pursuing tertiary studies, or starting a business. “To get credit for these things,” she says, “you need a good credit score, and to build one, you need a strong credit history.” Defaulting on debt has a negative impact on your credit score, with profound consequences if you want to apply for a home loan, vehicle financing and other kinds of credit down the line. To keep your credit score in the green, there are some simple steps you can take to positively manage your debt.

Understand how your credit score is calculated

According to the FICO model, the various credit behaviours in your name are weighted and calculated to determine your credit score:

• Payment history: approximately 35%
• Amount owed: 30%
• Length of credit (considers your oldest account, newest account, and the average age of all your accounts): 15%
• Credit mix (the different types of credit accounts you have): 10%
• New credit (opening lots of new accounts in a short space of time makes you appear riskier): 10%

“Managing your credit starts with knowing your credit score,” says Ndimande. You can visit Sanlam Credit Solutions as often as you like to get a free credit report without affecting your credit score. Plus, a financial coach can help you make sense of it and offer you ways to improve it – also for free. “If your score is not where it needs to be, it’s wise to act fast to turn this around,” says Ndimande.

Take these steps to improve your credit score

• Always pay your debts on time.
• Consider your credit utilisation ratio. This is the amount of revolving credit you’re using, divided by the total amount of revolving credit you have available. Ideally, your ratio should be closer to 30% and for a great credit score, it should be around 10%.
• Know your affordability, and only take out credit you need and can afford to pay back.
• Negotiate your minimum payment amounts with creditors, and ensure you honour these arrangements and pay the agreed amount on time.

Just beginning your credit journey? Start small with a cell phone contract, for example, or a credit card. When taking out a credit card, ask your bank to cap the available amount at a figure that suits you – not necessarily the full amount that you qualify for.

If you’re finding there’s ‘more month at the end of your money’ lately, forcing you to lean on credit to make ends meet, Personal Finance Author, Mapalo Makhu, stresses that payday loans are not the answer. In her recent video, she suggests prioritising an emergency fund and bulking up income by asking for a raise at work, starting a side hustle, or reworking your budget to cut unnecessary expenses.

You can use your existing debt to improve your credit score, if you commit to paying it off on time and keep a close eye on your utilisation ratio, concludes Ndimande. “Before taking on more debt, ask yourself what it will help you to achieve. Is it going to manifest in positive, constructive ways? If you feel that you need guidance, remember that Sanlam Credit Solutions offers a free credit coaching service.”