CREDIT SCORE TIPS FOR FIRST TIME HOME BUYERS
If you are buying your first home, chances are you need a home loan. Having the right credit score is your first step towards securing the funds you need. Your score could affect anything from credit approval and the principal amount you qualify for, to the interest rate on the mortgage. The higher the credit score the better, but what is it and what affects it? Let’s have a look at these questions and any others you might have as a first time home loan applicant...
Credit ranges and ratings in South Africa
The score range for South Africa is 0-999, where 0 is the worst you could have and 999 is the best. Ideally you would like to be at the highest possible score, however, very few (if any at all) have a score of 999. That is why most credit applications are calculated using the average credit score, which is around 600. For the best chance of a home loan approval with the best possible interest rate, you want your credit score to be somewhere between 614 - 999. Most people who are considered to have good credit have a credit score between these ranges.
Below is a breakdown of the score ranges and what they could possibly mean for your loan application:
|Credit score range||Description||Risk band|
|767 to 999 (Excellent)||High probability of bond approval at a favourable interest rate||Low|
|681 to 766 (Good)||Fair probability of bond approval at a fair interest rate||Medium|
|614 to 680 (Favourable)||Lower probability of bond approval at a fair interest rate||Potentially High|
|583 to 613 (Average)||Low probability of bond approval, probably at a higher interest rate||High|
|527 to 582 (Below Average)||Low probability of bond approval, probably at a higher interest rate||High|
|487 to 526 (Unfavourable)||Very low probability of bond approval||High|
|0 to 486 (Poor)||Very low probability of bond approval||High|
How do I build my credit score
Believe it or not, having some debt is better for your credit score than having none at all. Sounds backwards, but if you have debt and you're paying it back every month and on time, it shows that you are reliable and capable of paying back debt. On the other hand, if you have no debt, financial institutions have no idea if you would pay back the loan even if you have the means to, and this places you as a higher risk client. Once you set up a few lines of credit (for example, a store account or a credit card facility with your bank), you start building a credit history. Your credit score will then be determined by the amount of money you have borrowed in your life and how much of it you have diligently paid back on time.
What affects my credit score?
There are a number of things that could be influencing your score. Every financial decision you make will most likely have an effect on your credit score because it will count towards your credit history. That is why it is very important to make wise financial decisions from the get go. Some of the things that could influence your credit score are:
- Missing payments or not paying on time. Even if you make the payment up the next month, it will count against your credit score.
- Taking on too much debt. I know we said that no debt is not good, but too much debt is worse.
- Being blacklisted by a creditor for any reason.
- Too many applications or enquiry activity in a short period of time. Try to wait a month before applying to a different financial institution if your application was rejected.
Can I check my own credit score?
Checking your score before starting the application process is actually a smart idea. That way you will know if you stand a chance or need to work on it a little more before applying for your home loan. It is fairly easy to check your own credit score, and most places allow you to check your score once a month for free. Checking your own credit score is considered a soft inquiry and won't affect your credit. There are four main credit bureaus where you can check your score: Experian, TransUnion, Compuscan, and XDS. Some banks also allow you to check your credit status on their banking apps.
How do I boost my credit score?
Once you’ve checked your credit score and realise it’s too low to qualify for the best possible loan, there are some things you can do to boost it. Remember that the higher the score the better. Not only will it help you secure the loan, but it could give you the chance of securing a better interest rate — the lower the interest rate, the better, as this will lower your monthly repayment amount. Some things you can do to improve your score are:
- Set reminders to pay the debt on time, every time. Or schedule any payments as debit orders if you can to make sure that they are paid on time.
- Pay off outstanding credit card balances in full each month. If you’ve built up unpaid debt on various credit cards, pay those off in full and close the cards so that you do not repeat the cycle.
- Don’t take on more debt than you can reasonably handle.
- If you have too much debt, consider debt consolidation.
- Try to avoid revolving debt, as it has high-interest rates and is more difficult to pay off.
- Make sure to check your credit score regularly and check that everything is correct.
Check in with the experts
Once you have your credit score at the optimal level, it is time to find that perfect first home. This is where the friendly and professional team at RE/MAX comes in. Not only can we help you find the perfect home, but we can also put you in touch with bond originators to help you find the best possible home loan to finance it.
Disclaimer: The purpose of this article is to provide general information. Readers must please seek professional legal and financial counsel for actionable advice on this topic. RE/MAX of Southern Africa cannot be held liable for any action taken by the reader of this article.