Buying a home is a significant aspect of building one’s personal wealth. If you need financing from a bank or any lending institution, you need to have a good credit score to be eligible. A good credit score will open the door to better interest rates, ensuring the best deal possible when purchasing a property.
Here’s what you need to know about the importance of a good credit score when purchasing a property:
The importance of a credit score
Credit scores are 3-digit numbers that are tracked by credit bureaus. Credit bureaus are companies that put together credit reports which contain information on your credit history. Examples of credit bureaus in South Africa include TransUnion, Experian, XDS, and Compuscan. The primary responsibility of these bureaus is to measure an individual’s ability to manage their debt and pay bills on time.
A good credit score indicates that an individual can pay off debt with a low probability of defaulting on payments, whereas a low credit score indicates the opposite. Financial institutions want to be relatively confident that the person they lend money to will pay it back, with interest, as per the agreed terms, which is why credit scores are so important when granting home loans.
Added to that, home loans are usually hundreds of thousands of Rands and sometimes millions, so a credit score plays a critical role in the bank’s vetting process to mitigate the risk of them losing money through unpaid debts. This is also why people with higher credit scores tend to get mortgages with lower interest rates and people with lower credit scores tend to qualify for mortgages at higher interest rates.
You can improve your credit score by taking the following tips into account:
Check your current credit score and record
First and foremost, you need to have a clear picture of where you stand credit-wise prior to your home loan application. In South Africa, you’re entitled to at least one free credit report per year which you can get by signing up to one of many credit check online portals. A credit score that is 670+ is considered good, whereas anything below 600 is considered a high risk to lend money to.
Once you know if your credit score is high or low, you can either move forward with applying for your home loan or start the process of improving your credit score before applying for a mortgage.
Review your credit record for any errors and dispute them
When checking your credit score, be sure to review your report for any possible discrepancies. Credit report errors are more common than you think and they can negatively affect your ability to get a mortgage at a great rate. You can dispute any errors on your credit report by sending a dispute letter to the credit bureau that made the error as well as any documentation that proves that they are at fault. It’s also recommended that you send a letter of dispute and the supporting documents to the creditor as well.
The credit bureau will send you the final results of their investigation as well as your credit report reflecting the new change if they find that an error was made. If you feel as though your credit dispute wasn’t adequately resolved, the Credit Ombudsman can help you take your case further.
Pay off any debt that is in collections
If your debt has been given to a collections agency, you need to pay it off as it’ll affect your credit score negatively. You can ask the collections agency for a pay to delete payment option, which means once it’s paid, it will be removed from your credit record.
It’s important to record the information from the call you have with the representative of the collections agency, such as the person you spoke to, what was said, as well as their contact details. It’s also important to get a letter from the collections agency confirming that they’ll remove the information from your credit profile.
New credit regulations in South Africa state that creditors have 7 days to inform credit bureaus once a debt has been paid in full.
Always pay your bills on time
Paying your bills timeously is a sure-fire way to ensure that your credit score doesn’t take a dip. It’s always good to have a monthly budget to avoid overspending and, if possible, pay some of your bills in advance.
Apply for a credit card or a line of credit
Applying for a credit card is a good way to build a solid credit record. You can also choose to sign up for a store account to build a credit history. Just make sure you manage your budget effectively to prevent overextending yourself and thereby your ability to repay the credit made.
Keep your credit utilization to a minimum
It’s recommended that you keep your credit use up to 30% as using more than the recommended percentage can impact your credit score negatively.
Don’t take on additional debt while taking out your mortgage
Once you’ve started your mortgage application process, refrain from applying for any more credit as this could affect your application process negatively.
Don’t have too many credit inquiries at the same time
Avoid submitting inquiries for multiple lines of credit at the same time as this will show up on your credit report and financial institutions may see you as a high-risk borrower. This is because opening too many credit inquiries at once reads as a sign of desperation.
Having a good credit score will positively impact your ability to apply for a mortgage bond at a favourable rate to enable you to purchase the property you desire. Using the tips above, you can ensure that you improve and maintain your credit score and make your dreams of becoming a property owner a reality.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)