How to keep your credit score healthy
We all know that a credit score is a very important part of healthy financial habits. It’s also what determines whether you get a loan or credit and how high your interest rates on it will be. So it’s important that you make sure that you maintain a healthy credit score, or find strategies to help you improve it.
This may seem difficult or even easy – depending on your situation, but there are key factors that you need to take into account when working towards a healthy credit score. It’s more than just paying your bills on time or paying off debt, it includes healthy money habits that you should start making sooner rather than later.
What is a credit score?
Your credit score is a number that is determined according to your debt habits and management. It includes the amount of debt you have, your payment habits (do you pay on time and in full) and how often debt inquiries are made against your profile. The higher the number, the better the credit score and the better it is for you. This is typically used by lenders to see if you would be a good candidate for credit based on your history and risk profile.
Your credit report is based on the following three factors:
- Your overall score – this three-digit number is calculated by credit bureaus based on statistical models and not all of them have the same scoring system. This score is one of the things that a potential lender will use to consider your debt application.
- Your credit history – this is information about previous and existing credit that you have. Here the amount and type of loans will be taken into consideration, as well as missed payments, disputes or judgments.
- Your monthly obligations – this is based on all types of accounts that you have, like store accounts, municipality or insurance. The aim here is to determine if you pay your bills diligently and as agreed contractually.
It all starts with healthy money habits
A healthy credit score stems from a healthy financial situation. The more dire your financial position is the worse it will be for your credit score and future credit applications. That’s why it’s important to start with the small stuff.
- Spending habits and budgeting – a good starting point is to determine what you’re spending your money on and how you can make sure that your spend isn’t more than your income. There are three steps to help you understand your spending habits;
- Track your spend – this will help you get a clearer picture of where your money goes. This could be as simple as unnecessary banking costs or outrageous buying habits. By putting it together you will have a clear picture of what’s eating away at your money and help you start looking for strategies to fix this.
- Categorise your expenses – categorise your expenses based on what they’re used for, ie home, transport, educational, personal etc. This will further help you get an idea of what you’re spending too much on to give you a starting point towards fixing it.
- Classify your wants and needs – we all have things that we have to buy and pay for, but also things we don’t necessarily have to. An example of a need is paying your rent or bond, whereas a want can be something like a daily takeaway coffee or a pair of expensive shoes. Determining if you can afford both will help you budget better.
- Wants vs needs - now that you know what you’re spending habits are, you can have a look at which of these fall within the wants or needs category. It is important to distinguish between them as it will further help you understand your spending patterns and further inform your budget. This will help you identify where you’re wasting money, what you need to prioritise and help you on a path to start saving. This is an important step before you set up a budget as it will help you weed out the unnecessary expenses before you start following a strict budget.
- Intentional saving – saving money should be one of your main goals, not only to give you financial peace of mind but also to help you reach specific goals in life. Treat your savings like an account that you must pay every month and stick to it. Even if you only save R50 per month over 12 months you’ll have accumulated R600 in savings which could come in handy in difficult times. Set a specific savings goal, ie I want to buy a new car and need to save for a deposit and then start saving as much as you can towards this goal.
Setting up a budget
A budget plays a key part in financial wellness and in managing your credit score. If you find yourself in a position where you are struggling to make ends meet and have bills piling up, it’s time to start budgeting so that you can live within your means.
Your budget must be a true reflection of your income and spend otherwise you won’t be able to manage what goes in and out of your account. Even if you just buy a chocolate you need to add that to your budget as an expense.
A budget isn’t a once-off thing and should constantly be revisited. Keeping track of your expenses using a budget is an excellent way to keep you honest about where your money is going and how you could perhaps restructure your spend.
A good budget should include the following:
- Your income – salary and other.
- Your expenses – listed and categorised
- Contributions to savings goals
When you put this into action you might find that there is a shortfall, this is when you need to start considering your options like negotiating lower premiums on your insurance or finding more economic ways to commute.
How to start saving
Saving isn’t easy, but it is an important part of your financial health. It’s important to remember that a little goes a long way and could go even further if you use investment solutions to grow your savings. Whether you’re saving change in a jar or contribute to a savings account on a monthly basis, keeping that back-up will help you when you’re in a pinch.
Another important aspect of saving is savings intent. You might find yourself more motivated to save if there’s a reward in the end, such as a holiday or a new spare wheel for your car. Here’s how you can go about saving in five easy steps:
- Set your savings goal(s).
- Free up money where possible to put towards your savings goals.
- Put your savings in your budget and stick to it.
- Choose a savings solution, ie a savings account, an investment account, etc.
- Check your progress monthly and review your budget.
A healthy credit score comes from a healthy financial life. Sweating the small stuff is important in your journey to maintain or build a good credit score.
Want to know more?
For more helpful tips on managing your finances, download The Essential Guide to Money Management or visit MoneyEdge for educational courses to help you on your financial journey.