You might not be able to afford something you need at the time, the solution? You can go and buy it on credit. While most people advise you not to ever use credit sometimes it is unavoidable and for somethings you have to have a credit history and that requires opening and managing an account. We discuss the meaning of credit rating and how it works, you need to build one before you attempt to borrow money.
Each individual has a credit score. A credit score is a number or category that reflects how good or bad a credit risk you might be. Normally, the higher the number, the better the risk you are, this means the chance of securing more credit is higher than if you had a low credit score. Your credit score can determine:
- whether a lender is willing to lend you money
- how much money you can borrow, and
- what interest rate you will be charged
A better credit score will ensure that you are offered better interest rates, so it is in your “interest” to ensure that you manage your credit well. Your credit score can be determined by your credit history, this is a record of how much you’ve borrowed in the past and today and how you’ve managed your debts, have you always paid it off in time for example.
Generally your credit score is determined by five main categories:
- Payment history ( 35% of the overall score)
- Amounts owed (30% of the overall score)
- Length of credit history (15% of the overall score)
- New credit (10% of the overall score)
- Type of credit used (10% of the overall score)
Remember to always try and keep a good credit rating as the moment your credit rating goes down it can become a slippery slope that is very hard to climb up again. A healthy credit score can reflect more positively on somebody compared to somebody that doesn’t have credit as it shows you are reliable. Here are a few tips to keep you in the black:
- Always pay the required amount at the correct time on accounts
- Stay as far away as possible from the maximum limit that you can take out
- Ensure that applications are completed accurately to prevent information errors
