How to rebuild your credit score

If debt has damaged your credit record, it’s essential to find ways to improve your status as soon as possible. When your credit report reflects responsible financial behaviour, creditors will become confident enough to extend credit to you again.

Here are some useful credit tips and tricks that will help you establish and improve your credit score and financial outcomes.

Understanding the difference between good and bad credit scores

Before you begin rebuilding your credit status, it’s essential to understand the difference between good and bad credit and the various factors that influence it.

This knowledge will guide you in making informed decisions to improve or maintain your credit score.

What is a good credit score? 

Your credit score is a number that reflects your borrowing behaviour. Lenders use it to determine whether it may be risky to lend to you.

A good credit score is essential as it opens up a wider range of financial opportunities, from qualifying for a home loan, vehicle, car finance or business loan to securing lower interest rates.

By maintaining responsible financial habits, you can work towards achieving a good credit score – but what does this look like?

Good credit score ranges from different credit bureaus

Different credit bureaus have different credit score ranges, but you can check your score at any of the major bureaus.

If you’re applying for a loan and have consistently paid your bills on time for the past five years, have a good mix of credit accounts, and have not taken on too much debt, your score should be favourable, no matter which bureau you choose.

According to one credit bureau’s scoring model, your credit score could be 680. Another may place more emphasis on the length of your credit history, resulting in a slightly higher score of 690. And yet another bureau’s unique scoring algorithm could give you a score of around 675.

Each credit bureau uses its own algorithms to calculate credit scores, focusing on various factors, such as your payment history, the length of time you’ve managed credit, and your reliance on debt.

This means that slight differences in the data used by each credit bureau can lead to variations in your credit score. However, as a rule, the higher your score, the better.

How to achieve a good credit score 

Your credit score can change over time, which means improved financial behaviour can benefit your score. There are several ways to work towards a good score.

These include:

• Paying your bills on time. Your payment history is usually the most heavily weighted factor contributing to your credit score. Make consistent and timely payments as even one late payment can lower your score.
• Managing your debt well. Reducing your debt, not using more than 30% of your available credit, and repaying more than the minimum amount due will help you maintain a good credit score.
• Having a long, unblemished credit history. A longer credit history means you’ll have an established credit profile, which creditors will view favourably when lending.
•  Making few credit enquiries: Limit the number of credit enquiries you make – for example, don’t apply for many new credit accounts quickly. Too many “hard enquiries” can negatively affect your credit score.

The importance of a good credit record  

A strong credit record is crucial for a wide range of financial activities in South Africa. It indicates your financial reliability and can help you access credit and other financial opportunities. It increases your chances of loan approval and may also help you qualify for lower interest rates because you’re seen as a low-risk borrower.

A good credit score is an asset that can help you achieve your financial goals.

What is a bad credit score?

A bad credit score is not just a low number – it represents poor financial behaviours, such as not paying bills on time and skipping payments. Other factors include being under debt counselling, or when your assets have been used to pay off your creditors.

The good news is that a bad credit score does not need to be permanent. Taking active steps to improve your financial behaviour can help you work towards improving your score.

When do you fall within a “bad credit score” range?

As explained above, credit score ranges differ from one credit bureau to the next. However, a bad credit score is generally any figure below 600.

Lenders also have their own specific criteria to determine a bad credit score. What is “bad” for one may be only “poor” for another. Either way, you’ll need to improve your score to qualify for credit.

Factors that contribute to a bad credit score

The following behaviours can lead to a bad credit score:

• Skipping payments, paying late, or paying less than the minimum amount due each month. 
• Failing to pay off your balance.
• Taking on too much debt. Just because you qualify for more credit doesn’t mean you should take it.
• Using more than 30% of your available credit could lead to you relying on credit.
• Not closing inactive accounts, which means they’ll continue to form part of your credit utilisation ratio. For example, if you’ve spent R5,000 and your credit limit is R10,000, your ratio will be 50%. However, part of the R10,000 may be from an unused credit account.
• Failing to contact your creditors if you can’t make a payment. Non-payment can lead to late fees, penalties, and even legal difficulties. 

The consequences of having a bad credit record

Having a bad credit record can hurt various aspects of your financial life. Understanding these consequences can give you an idea of the importance of maintaining a good credit record, and motivate you to improve your credit score.

What can happen if you have a poor credit record?

• Difficulty obtaining credit. A low credit score can make it hard to get a loan, as you’re considered a high-risk borrower. 
• Higher insurance premiums: Insurance companies may not be willing to sell you insurance products and may charge higher rates if they believe you will default on payments.
• Challenges in getting a job: Potential employers may be put off if you have a poor credit history. Many employers check credit reports as part of the hiring process.
• Obstacles to renting: A landlord may not want to rent out their property to you if you’re facing financial difficulties. This is because they want to be sure that rental payments will be made on time.

Steps to rebuilding your credit score

Improving your credit score can seem challenging, but following a structured approach can steadily grow your score and help you regain financial stability.

Here’s a step-by-step strategy to achieve this.

1. Check your credit report

The first step to rebuilding your credit score is to check your credit report for errors. You need to ensure all the information in the report is accurate and current.

Request a free credit report and review it to spot any inaccuracies or fraudulent activities that may damage your score.

Checking your credit score gives you a clear idea of your financial position, and should motivate you to change your financial behaviours. It’s important not to ignore your score, or assume it’s a figure that doesn’t concern you.

2. Pay your bills on time

Consistently paying your bills on time – that is, maintaining a good payment history – is a significant factor considered by credit-scoring algorithms. It is one of the most effective ways to improve your credit score.

Late payments can damage your score, so even if you can only make the minimum payment, paying on time is essential to avoid late fees and negative marks on your credit report.

This applies to everything from credit cards, utility bills, personal loans, home or car loans, and retail accounts to overdrafts and debt collection.

3. Reduce your debt

Focus on paying off existing debt, especially high-interest credit-card debt.

To reduce your debt, choose between the “snowball method” (paying off the smallest balances first) or the “avalanche method” (settling the highest-interest debts first).

4. Diversify your credit mix

Having a variety of credit types can positively impact your credit score, as it shows you can manage different types of credit equally responsibly.

However, only apply for and use credit that you genuinely need and can manage well.

5. Monitor your progress

There is no quick, easy way to rebuild your credit score – it takes time and discipline. However, the benefits are worth the effort.

Start by regularly monitoring your score to track your progress. Many financial institutions offer free credit score tracking services, and numerous online tools are available.

This will help you with credit repair – improving your credit score by addressing negative information in your credit report. Dispute any errors, pay off your debts quickly, avoid taking on new debt, and use credit responsibly.

Credit restoration is a complex process, and it takes time to see results. You may need to work with a debt counsellor to assist you.

However, you’ll be motivated to continue once you start seeing the results, with an improved credit score bringing you closer to realising your financial goals.

Frequently Asked Questions (FAQs)

Is it possible to improve a bad credit score?

Yes, with consistent effort and the right strategies, you can improve your credit score over time.

How long does credit recovery usually take?

The time frame varies based on individual circumstances, but you can start seeing improvements within a few months to a year.

Can DebtBusters assist with all types of debts?

DebtBusters specializes in managing unsecured debts such as credit cards, personal loans, and retail accounts.

Are there any DIY credit repair methods?

While there are steps you can take on your own, professional guidance like DebtBusters' expertise can expedite the process.

Will rebuilding my credit history prevent future financial challenges?

While it won't eliminate all financial challenges, a strong credit history can make it easier to access credit and secure better terms.

DebtBusters can help you navigate this journey, and provide the support you need to get back on track. This may include debt counselling and debt consolidation services, which can help you free up cash and reduce financial stress. Do not hesitate to contact us for assistance.