Understanding your credit score - and expert advice on how to build it from scratch

Financial adviser and co-founder of Galileo Capital, Warren Ingram, demystifies your credit score and offers a clear, actionable guide to building and improving it.

Listen to the interview below:

Think of your credit score as your financial report card for lenders. It's a number, calculated by independent companies called credit bureaus, that assesses your creditworthiness.

It’s a Number: Your score typically ranges from zero to 743 or 999, depending on the bureau.

It’s a Risk Gauge: Banks and other lenders use this score to determine if you are a dependable person to lend money to. A higher score indicates you are seen as a lower risk.

It Affects Your Wallet: A high score doesn't just increase your chances of getting a loan; it can also help you secure a better interest rate, saving you a significant amount of money over time.

A common myth is that completely avoiding debt will guarantee a perfect score. Ironically, the opposite is often true. If you've never borrowed money - perhaps you've just finished university or have always been a careful saver - you probably have a low or zero credit score. Lenders lack a history to evaluate, making you an unknown risk. The key is to actively build a positive credit history.

So, how do you build a credit history from zero? The goal is to demonstrate to the credit bureaus that you are disciplined and reliable with financial commitments.

1. Start with a Monthly Account
   
   One of the simplest ways to begin is by opening a monthly account, such as a mobile phone contract. Even though you're paying for services used that month, using a service and paying the bill on time creates a record of reliable repayment. This is a low-risk way to start building a positive credit record.
   
   
2. Consider a Secured Loan

   This is a powerful strategy for those wary of debt or struggling to get approved. Here’s how it works:

   - You give a bank a sum of money (e.g., R2,000) to hold in a savings account as security.

   - The bank then issues you a credit card with a limit equal to that amount (R2,000).

   - You use the card and pay it off responsibly. For the bank, this is extremely low-risk because they already have your money as collateral. For you, it’s an excellent way to build a documented history of managing credit well.

If you already have some credit history, follow these tips to improve your score over time.

1. Pay All Your Accounts on Time, Every Time
   This is the most critical factor. Your payment history on every account—from store cards to your mortgage—is recorded. Paying the full amount by the due date builds a strong positive history. Conversely, late or missed payments will harm your score.
   
   
2. Manage Your Major Debt Responsibly
   Paying a large debt, such as a home loan or bond, consistently and on time has a significant positive impact. It shows you can handle substantial financial responsibilities by paying a little more than the minimum required, which demonstrates even greater financial control.
   
   
3. Avoid Maxing Out Your Credit Facilities
   Just as you wouldn't drive a car at top speed constantly, you shouldn't use 100% of your available credit limit. If you have a facility for R3,000, try to use only R2,700. This shows lenders you have "room to breathe" and are in control of your finances, not living on the edge of your limits.
   
   
4. Maintain a Healthy Variety of Accounts (Carefully)
   Having a mix of different account types (e.g., a retail account, a credit card, and a bond) that you manage well can boost your score. It demonstrates your ability to handle multiple financial commitments. However, a crucial warning: only do this if you can comfortably afford the repayments. Taking on too much debt will harm both your score and your financial health.

Key Behaviours to Avoid

Don't Lie on Applications: Credit bureaus share data across institutions. Lying about your existing debts on a credit application will be uncovered and will severely damage your credibility.

Don't Panic About Past Mistakes: Time is on your side. A history of late payments will harm your score the most in the short term. As time passes (e.g., after 18-24 months), the impact of these old mistakes fades, provided you maintain good habits moving forward.

Building an excellent credit score is a marathon, not a sprint. By starting small, being consistently responsible, and managing your debts wisely, you can build the strong financial profile needed to achieve your future goals, like owning a home, on the best possible terms.