Renting or buying | Why your credit score matters

Getting ready to enter the property market for the first time? Well, whether you are looking to rent or buy your first (or subsequent) home, one of the first things that will be checked before you will be approved, is your credit score.

It is therefore vital that you ensure your credit history is healthy and that you maintain a good credit score. A credit score is a point system that reflects your creditworthiness and how well you pay your accounts and manage your financial well-being.

It is a vital tool used by banks, rental and estate agents and other parties to assess your affordability and history relating to keeping up with credit agreements and payments.

You need to build up a good credit history

To achieve a good credit score, you will need to build a credit history. Without a credit history, it makes approvals for a home loan and rental property more difficult because a creditor cannot assess your affordability or payment history.

A credit record is built by taking out credit such as a cell phone or store account, or a loan from a bank. You will need to build up a record over a few months before it could be assessed as an adequate record.

Any late or skipped payments will unfortunately reflect poorly and will bring your credit score down. This means that you will need to first correct the record by getting your payments up to date and showing a few months of regular payments.

Also vital to a good credit score is to keep your debts to a minimum and not overextend yourself insofar as monthly repayment commitments are concerned. If you are overextended, it will affect your credit score and will count against your affordability.

Keep outstanding account balances low and do not take on too much credit. Ensure your credit card limit is set as low as possible. Remember, all outstanding debt will be offset against your earnings and assets to check affordability.

Keep track of your credit score

Your credit and payment history is tracked by various credit bureaus. All consumers are entitled to receive one free credit report annually. You can also contact them if you need to check your credit record, but there is usually a cost involved.

A credit score works on a scale (noted below). Generally, a score above 670 is regarded as a "good" score and below 600 as "high risk".

781 to 850 - Excellent

661 to 780 - Good

601 to 660 - Fair

500 to 600 - Poor

300 to 499 - Very poor

It is vital that you keep an eye on your credit because, depending on the severity of the issues, it could take upwards of three months to a year to turn around a poor credit profile.

Keep your credit in check once you have an approved home loan

Once you have put in your Offer to Purchase a property and a home loan is approved, it is vital that you do not do anything which might affect your credit standing. The banks usually have standard terms and conditions in terms of which they could withdraw their loan offer at any time before the transfer is registered. 

What's included in a credit score and what will you find in your credit report? 

Your credit report is a combined summary of your financial background with an overview of your credit score, financial accounts, profile, and rating. Typically a credit score is from 0 to 999, and is calculated by using all the details on your credit profile. Metrics used by the different bureaus' weight all your financial decisions and payment history, allowing them to collate and detail any potential risk to lenders.

Things that negatively impact your credit score and report include erratic or non-payments. Payment history is one of the most important contributors to a good credit score. And ironically if you don't have debt, you won't have any credit score, which can also put you at risk of not securing a home loan.

So how do you improve or build up a good credit score?

·         Regularly check your credit report to confirm all the details are correct - and while you can do it free at least once a year, experts suggest at least twice a year.

·         Make payments on any outstanding credit accounts on the due date. Should you have difficulty in making your payments, you should contact your credit provider to agree on a payment plan, or to reduce your regular payments to an amount that you can afford to pay.

·         Put debit orders in place instead of needing to do the payments manually

·         Close any old or unused credit accounts

·         Reduce or clear any outstanding negative balances - outstanding balances over an extended period of time up your risk factor.

How long does it take to improve your credit score?

If you follow the steps to good credit management, aiming to clear as much of your debt as well as manage your payment profile better - it could be as little as three months before you start seeing improvements in your score.

If you have had a couple of bad experiences with your credit health, it is helpful to know that credit inquiries stay on your credit report for up to two years, whereas more serious activities that you incur, namely late payments, lawsuits, bankruptcy and tax liens, will stay on your credit record for up to ten years.