Credit providers use your credit score to determine the risk level of your credit application before either its approval or denial, aka your creditworthiness. A higher credit score is more likely to result in the credit being granted on favorable terms than a low score.
Here are the best ways to improve your credit score and increase your chances of credit approval.
- Get your credit record straight
A credit score is just a number, but its calculation depends on the information contained in the credit report, which includes personal info and critical data about your credit account history and previous credit enquiries.
If this data is wrong, lacking or inaccurate, the credit score may be lower than expected and needs to be adjusted before submitting another loan application unsuccessfully.
Suppose you opened a credit account in the past. The credit record will show the type of this account (credit card, personal loan etc.), the opening date, the credit limit or the loan amount, the account balance or the loan history. It will also convey the following crucial info:
- A history of missed payments or poor repayment records are visible in your credit report and result in a lower credit score.
- Frequent credit inquiries before various loan applications show credit dependency and decrease the final scoring.
- A high credit limit reached or outstanding account balance indicates mounting debt on your name, thus reducing chances of accessing more credit.
The solution to improving the credit score is to redress the negative information in the credit report, which may change the scoring in your favour:
- Check the record and update any old and incorrect information. For example, close any accounts you are not using anymore.
- Make repayments regularly and timely on outstanding credit accounts. If you cannot keep up with multiple loans, automate your repayments.
- Reduce current account balances. For example, consider paying a lump sum or increasing the monthly instalment towards the loan balance or credit card account.
- Build up the credit record if you don’t have enough data for the credit score required to access significant credit such as a home loan. Doing so diligently will radically increase your credit score. You may need to demonstrate positive credit habits by taking on extra debt, e.g. applying for a new credit card, store account or vehicle finance.
A cautionary note: While income level or employment history are not included in the credit report, some financial institutions, credit providers and even employers may take this info into account, aside from the mandatory credit check, to assess financial stability.
- Reduce your debt-to-income ratio
As seen above, improving your credit score depends on maintaining good credit behaviour and reducing outstanding debt before considering another financing deal. Looking at your debt-to-income ratio gives a good indication of your debt management and credit profile.
The debt-to-income ratio (DTI) helps credit institutions to determine your creditworthiness before granting a specific type of loan or credit on application. It’s calculated as all your monthly debt payments divided by your gross monthly income (income before taxes).
A low debt-to-income ratio (20%) shows a good balance between income and debt. A high debt-to-income ratio (over 40%) means you are already using a large portion of your income to service debt, and there is less chance to qualify for a home loan, for example.
According to tradingeconomics.com, in 2020, South Africans had a household debt-to-income ratio of 77%, compared to an average of 72% in the previous three years, which is extremely high and unsustainable. When your debt-to-income ratio is abnormally high, it means you are over-indebted and in danger of poor credit scoring.
There are three ways to lower the ratio: increase your income, reduce debt or a combination of these two. ezDebt counsellors can advise on the proper debt management and the steps to be taken to achieve a satisfactory debt ratio, lower debt levels, and improve your credit score as a result.
- Get rid of multiple debts via debt consolidation
The biggest culprit in having a bad credit score and constantly being denied credit is enormous debts. Your credit score will not improve unless you tackle these massive debts firstly before any future obligations.
Despite all your best efforts to manage mounting debt, it’s common to feel overwhelmed by multiple payments and struggle to commit to the creditors’ initial repayment plans. Also, you may not afford to service the debt anymore due to loss of income or retrenchment. The solution is to restructure your debt so you can resume paying.
Under debt consolidation, all debts are placed in one repayment plan and subject to one affordable monthly repayment that you can safely pay back to creditors. You have to contend with a more extended repayment period and higher interest, but nevertheless you continue paying creditors and avoiding asset repossession and loss.
Furthermore, paying off one loan instead of many will help maintain a regular payment schedule and lead to a healthy credit profile and credit score.
Debt consolidation is a great option for restructuring debt without affecting the credit score negatively in long term, unlike other alternatives such as debt settlement (paying less than initially owned to creditors). Debt consolidation remains on your credit report until all debt is clear and a clearance certificate is issued.
Our professional ezDebt advisers can help you stay on track with debt repayments through a quick and affordable debt consolidation plan. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.