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The importance of understanding the power of a credit score

The importance of understanding the power of a credit score
03-07-24 / Sisanda Ndlovu

The importance of understanding the power of a credit score

Johannesburg - Too many young South Africans are entering the workforce without a sufficient understanding of financial fundamentals. This concerning trend is highlighted by financial services provider Atlas Finance, which regularly encounters high numbers of customers lacking knowledge of basic financial principles.
Financial education is essential for enhancing economic participation and personal development in young South Africans. The need for improved financial literacy is underscored by the Financial Sector Conduct Authority (FSCA), which, in partnership with the Human Sciences Research Council (HSRC), found that only about 51% of South Africans are financially literate. The FSCA, the market conduct regulator and financial institution overseeing the financial services industry in South Africa, emphasises the importance of financial education in addressing this gap.
Coupled with the low financial literacy rate is a challenging economy which has seen consumers appetite for credit increased according to data by the National Credit Regulator shows that the appetite for consumer credit increased from Q3 2023 to Q4 2023.
Credit analytics group Experian’s Head Data Insights, Ans Gerber, says approval rates for credit have remained low for the first quarter of the year with just over 30% of loan applications being approved. “The reasons behind low approvals include increased inability of consumers to meet debt obligations (also called ‘affordability’) and a likely reduction in qualification for credit – especially considering lenders being more risk-averse in the post-pandemic time than what was the case pre-COVID.”
These statistics indicate a pressing need for increased financial literacy education. Atlas Finance Risk Director, Niresh Gopichand points out that many customers do not understand essential financial terms like credit and credit score when applying for loans. This lack of knowledge underscores the critical need for better financial education, which would empower young South Africans to navigate the complexities of credit and manage their finances more effectively.
“It is important to empower our young people, whether in rural or urban areas, with financial education which is key in securing their financial freedom and eradicating financial vulnerability,” says Gopichand.
He emphasised that providing essential tools to understand money and its workings is crucial. “Building and maintaining a healthy credit score ranks high on financial literacy as it influences important financial decisions including taking out loans for essential items such as education, purchasing essential household items, and buying a house or car
Gopichand provides a basic guide to understanding credit and credit scores.
What is a credit score?
Think of your credit score as a report card for your borrowing habits. It shows how reliable you are at paying back money you borrow. This score is based on your payment history, the amount of debt you have, and how long you’ve been using credit. Credit bureaus use this information to produce your credit score, which tells lenders how likely you are to repay a loan. The higher your credit score, the better. Lenders use your credit score to decide if they should give you a loan, what interest rate to charge, and how much credit to offer you.
Why credit matters
Credit is not just about borrowing money, good credit can help you access money when you need it, lets you invest in your future, and even assist in securing a job. But remember, credit comes with costs such as interest rates and fees, so always borrow wisely and within your means to allow you to pay back a loan responsibly.
Why is a good credit score important?
A good credit score can open many doors including access to loans or even accommodation. Landlords often check credit scores to see if you're a trustworthy tenant, while lending institutions use it to assess if you're a responsible borrower. Some employers check credit scores, especially for jobs that involve handling money.
What factors affect your credit score?
Several things can impact your credit score such as your payment history. You should always pay your bills on time. Overdue payments can impact your score negatively. The longer you've been using credit responsibly, the better. Borrowing responsibly is important and applying for too many new credit accounts in a short time can lower your score.
Some tips to help you build and keep a good credit score
  • Set reminders or set up debit orders to avoid missing due dates for payments.
  • Manage your money owing by paying down your debts, especially high-interest ones like credit cards.
  • Monitor your credit report and regularly check your credit report for errors and dispute any inaccuracies. You can get one free credit report each year from registered credit bureaus in South Africa, such as Experian and TransUnion. Experian offers free financial literacy education through its free progressive web app, called Up powered by Experian. This tool  teaches on money management and the world of credit and provides consumers with free unlimited access to their credit report and credit score. It also provides consumers email notification if new accounts are opened on their credit profile or if there is an enquiry for a new credit application on their profile.
  • Be careful with new credit and only apply for new credit when necessary, as each application can temporarily lower your score.
  • Pay attention to your affordability - whether you can comfortably repay the loan, considering your income and other expenses. This practice ensures you don't get overburdened with debt you can't manage.
“If credit is managed wisely, it can be a financial support system that is beneficial, and it can have a positive impact on your life.  Getting into good credit habits early in life can set you on the road to financial responsibility where the benefits can be reaped throughout adulthood,” Gopichand concludes.

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