How to manage your credit score - and get a home loan

Most people appreciate the importance of maintaining a good credit rating and strive to do so, yet many are still genuinely surprised when a credit check throws up negative results and their applications for finance are declined.

"Many people don't realise that seemingly minor things can count against them, including late payments and unresolved disputes with companies, even if they are in the right," says Jill Lloyd, Area Specialist in Rondebosch and Claremont for Lew Geffen Sotheby's International Realty.

"All too often we see financially stable and generally credit-worthy buyers having their dreams dashed by long-forgotten accounts like doctor's bills, often innocently overlooked because of circumstances like moving house. And, although they may have originally been small amounts, legal fees and penalties can escalate the amount owing and sometimes there is even a judgement against them."

Lloyd believes that knowledge is key when it comes to managing one's credit.

"The more you know about what affects your credit score, the easier it will be to maintain a good one, especially if you are planning to apply for substantial finance like a home loan," she says.

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"Although the two most critical requirements are a good credit score with a track record of repaying contractual debt responsibly and being able to afford the monthly bond instalments, banks also take several other factors into consideration."

"A factor which one would expect to count in an applicant's favour is having high but unused credit available on retail accounts and credit cards, but the opposite is true," explains Cheryl Zartz, Property Finance Specialist from ooba, national home loan comparison service.

Zartz says banks will automatically include the potential instalments on these unused credit facilities in their affordability calculation, with the rationale being that the applicant could at any stage max out his or her credit facilities.

So before applying for home finance, if you have unused or seldom used credit facilities with high limits, you should either reduce the limit or close unused accounts in order not to prejudice affordability for a bond.

She also advises that people limit their finance applications to when absolutely necessary as too many credit inquiries, whether they be for a credit card or a loan, can negatively impact on your score.

"This is one of the key benefits of using a bond originator when shopping around for the best rate as, being service providers rather than credit providers, they therefore leave no footprint."

Lloyd adds that there is a difference between qualifying for credit with regard to gross income and affordability, both of which the banks take into consideration.

"But, as a rule of thumb, the larger the margin between gross income and expenses, the better the rate applicants are likely to be offered, so I always also advise people not to go buying a brand new car, but to rather get the house first."

She also reminds us that a good credit score is equally important in the rental sector, and that it can be very difficult finding a home to rent if one is regarded as high risk.

"According to Payprop South Africa, almost 40% of tenancy applicants in Q1 of this year were classified as either high risk or very high risk," says Lloyd.

"And, although a tenant's credit score is not necessarily an accurate indicator of how reliably they will pay their rent, it's usually the only way agents have of gauging potential payment behaviour."

"The best way to establish a good credit score is consistently over time. Start with small accounts like store credit and cell phone accounts and try to include a credit card in the mix as banks will monitor how you deal with it. Keep your debt low and always pay on time, paying more than the minimum instalment when possible," says Zartz.

Although the Credit Amnesty Bill implemented on 1 April 2014 stipulates that credit bureaux must now automatically remove paid-up judgments and paid-up adverse information listings, she says banks still have access to payment profile information which displays payment histories.

"So, if you have negative information on your credit report, there is unfortunately no quick fix as your credit score is influenced by your payment profile behaviour over the previous 24 months, so all you can do is pay your bills on time and be patient."