How good credit drives the economy.

From credit card swipes to vehicle financing, good credit keeps the wheels of the economy turning. Here’s how to build your credit profile and improve your creditworthiness.

By: Mark van Dijk an award-winning writer who focuses on business and tech trends.

Credit makes the world go round. Whenever you apply for vehicle financing to buy a car or a home loan to buy property, or even if you swipe your credit card to pay for coffee on the way to the office, you’re asking a lender to extend you a line of credit.

Credit is the engine that drives the economic machine. That’s true for businesses, many of which rely on loans to kick-start the cycle of making goods, selling goods, making a profit and making more goods to sell. It’s also true for households and individuals, who use credit to pay later for things they need now.

But while the basics of the credit economy are simple – I loan you money, you buy something, you pay me back – there’s a world of complexity around personal credit and creditworthiness. It all comes down to three important numbers.

Your credit score.?

One of the biggest myths around debt is that you’re better off never going into it. Accessing credit allows you to build up one of the most important things you’ll carry in the modern economy: a credit record.

?When you borrow money – whether it’s a home loan or vehicle financing, or just your monthly credit card bill – the credit provider will typically report your behaviour to agencies like Equifax, Experian and TransUnion. They’ll take that information – Do you stick to your payment dates? Did you repay what you owe? – and aggregate it to give you a personal credit score, which other lenders will then look at when they assess how risky it may be to lend money to you.

It’s a circle: if you want to access credit, you’ll need to be able to prove that you can manage that credit well. The only way to do that is to establish a history of creditworthiness and to have a credit score.

That three-digit credit score is the key to your financial life. It will range from 0 to 999, with anything above 650 considered to be good. Having a good credit score classifies you as a reliable borrower; but if you have a poor credit score (635 or under) or no score at all, approval to borrow money will be a challenge – even if you’re perfectly capable of paying back the loan.

In South Africa, everybody is legally entitled to a free annual credit report. In a recent TransUnion survey most consumers said that monitoring credit is at least moderately important (89%), with 62% saying they monitor their credit at least once a month. “It’s critical that consumers keep tabs on their credit report to stay on top of their finances during these challenging economic times,” TransUnion Africa CEO Lee Naik said in a statement.

Credit in a tough economy.

Credit is under the microscope in our Covid-bruised economy as things get more expensive and household budgets are tighter than ever. Battered by rising fuel and food prices, load shedding, high-interest rates and the tough economy, many South Africans are finding that their savings and income don’t go as far as they used to and they’re leaning into credit to make ends meet.

In the Bureau of Market Research’s Q2-2022 Consumer Financial Vulnerability Index, published in August, some 69.1% of respondents said they expected the state of consumer finances to deteriorate, while 45.7% expected consumers to feel even less in control of their finances. Added to that, nearly all respondents (96.8%) believed it would take more than another year for South African consumer finances to recover from the impact of Covid-19 and the national lockdown.

In that environment, it’s easy to see the importance of being able to borrow money – and of having a good credit score.

The importance of good credit.

In another TransUnion survey, more than 72% of South Africans agreed that their credit score is important to them, but only 45% said they understood how credit reports are generated. (That survey, by the way, was conducted in 2016. Simpler times.) Knowing your credit score is just half the work. Understanding how to improve it is even more important.

Good borrowing habits lead to good credit scores. Don’t borrow more than you can afford to pay back. Only borrow from reputable, trustworthy credit providers, and always make your repayments on time. Abiding to these basic rules will build and improve your score. Once you know your score, you can adjust your borrowing behaviour accordingly. Either continue as you are or make the necessary adjustments.

The better your credit score, the happier lenders will be to afford you credit. If A reliable borrower with a healthy credit score and a good track record, will have access to a world of credit and a world of opportunity. Ultimately, the power of credit is determined by your borrowing behaviour – so it’s in your hands.