How to get your credit rating on track, to be able to buy a home.
“Januworry” is over and hopefully your bank balance is looking a little healthier than it did a few weeks ago.
If you had a debit order bounce, possibly partly due to the length of time between that lovely early payment in happy December and that desperately needed injection by the end of the longest month of the year, January, you may be a bit worried about your credit score.
So how about a late new-year’s resolution? Let’s get your credit profile sorted. This is especially important if you’re a tenant who wants to own your own home sometime.
Besides the ‘want’ there’s the ‘need’ for financial security and property is an excellent investment. The ‘forced saving’ of putting part of your salary into a bond on the property you live in makes far better financial sense than paying rent to cover someone else’s bond!
But to get a bond, you’ll need a good credit rating, and that’s something you can start working on right now! Paul Stevens, CEO of Just Property, tells us how.
Apply The 50/30/20 Rule
US Senator Elizabeth Warren, a bankruptcy expert, and her daughter, Amelia Warren Tyagi, popularised this rule: split your income into three spending categories: 50% goes to essential bills and monthly expenses, 20% toward financial goals and 30% to personal spending (all the stuff you like to spend money on but don’t really need). Put the money earmarked for your financial goals into a separate savings account.
Pay Those Bills
And do it on time, every time. “More than a third of your credit profile (35%) is based on your payment history, and late payments or bit payments can have a major, negative impact on your score,” says Stevens.
The past is in the past – never be late again. You can move debit orders to a date when you’re sure you will have money, say the 3rd of the month. Then any public-holiday conflicts with pay day won’t impact you as badly.
Maxed out those credit cards over the festive season? Pay a little bit more than the minimum due every month. This, and a history of paying on time will do wonders for your credit rating.
Reduce Your Debt!
30% of your credit score is based on your outstanding debt percentage. You know how the climate crisis has got us all reducing our consumption of water and energy these days, not to mention reusing and recycling? Well, for a good credit score, you want to reduce your debt to be no more than 20-30% of your income.
To get there, start reducing consumption across the board. A little saved here and a little saved there will leave you with more to pay off your debt, overdrafts or retail accounts. “Choose one account to pay off and put all the extra you can into it at the beginning of the month,” advises Stevens. Keep paying a little above the minimum on your other debt and rinse, wash, repeat until that first debt is cleared.
Yay! Have one month’s celebration then start on the next debt – add what you were paying into that first account to your payments for debt #2… You’ll clear that even faster. Move on to debt #3.
“Keep going until you’ve cleared all debt, or at least got your total debt to below 30% of your income,” Stevens says.
But wait! Before you close all those old accounts and open new ones bear in mind that a proven track record of debt repayment is good.
Old accounts are your friends
“15% of your credit score depends on the age of your credit accounts. It is always easier to get credit if you already have credit, and especially a long history of good standing. If you close all your old ones and open a whole host of new accounts – or even just two or three, it can signal financial difficulties to the credit ratings algorithm,” Stevens warns. Rather keep a credit card account that you’ve paid off and use it fairly regularly, always paying the total balance owing each month. This will build a fantastic credit history because it’s all about financial management.
It’s all about how you manage it
10% of your credit score depends on how you’ve managed the loans and debt that you have. So, while the high interest charged on credit-card debt makes these accounts good options to pay off first, you do want to keep one or two open to show good management. So, once you’ve got your debt down, reduce your limits and, says Stevens, notify the credit bureau so they can update your profile. Then use your credit wisely.
If you have paid off any judgements against you, have these removed from your profile.
Bide your time
10% of your credit score is based on how many new loans you’ve taken and inquired about over a certain period of time. So, wait until you are ready to take out a bond before you do your loan shopping, and then, advises Stevens “complete it within a 45-day window, so that it’s treated as a single loan enquiry. Credit scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which enquiries occur.”
Now, imagine the happy New Year you’ll have when your debt is reduced, and your credit score is healthy. Don’t wait till next year, start now!