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Does Your Use of Credit Negatively Impact Your Credit Score?

9 May 2023

South African consumers are heavily reliant on their ability to use revolving credit. In fact, our use of credit on this basis is at its highest levels since April 2010, if TransUnion’s 2022 SA Consumer Credit Index is anything to go by.

This is unsurprising given the strain on people’s pockets due to rate hikes and a weak job market. Ayanda Ndimande, Head of Business Development at Sanlam Retail Credit shares insights into what credit utilisation is and why it's so important to manage it.

Ndimande explains, “Your credit utilisation rate contributes 30% to your credit score, which makes it a critical consideration in determining your creditworthiness. Keeping your use of credit low is essential to qualify for future credit. It’s vital to manage your debt through a considered approach that fits with your holistic financial plan and goals.”

What is credit utilisation?

Credit utilisation is the revolving credit you've used, measured by the amount you owe divided by your credit balance. For example, if you have a credit card with a R10 000 limit and use R3 000, your credit utilisation rate is 30%.

This rate can change according to your spending and repayment habits and mainly applies to revolving credit such as credit cards or store accounts. It does not apply to fixed credit, like home or vehicle loans.

Below, Ndimande shares how to manage your credit utilisation rate effectively.

1. Be proactive

Being proactive when applying for revolving credit means carefully evaluating your current financial situation and considering your income, expenses, and any outstanding debts. This helps you determine a credit limit you can afford. By proactively requesting a lower limit, you also prevent excessive borrowing and reduce the risk of accumulating debt that is difficult to repay.

“Credit card companies often offer to increase your credit limit after a certain period of responsible usage. While this can be tempting, be cautious about accepting the offer until you’ve done another thorough assessment of whether it’s financially feasible, or if it’ll lead to overspending and struggling to meet monthly limits,” adds Ndimande.

2. Practise restraint

Remember that using 100% of your credit limit negatively impacts your credit score, because it increases your credit utilisation ratio.

Financial experts recommend keeping your credit utilisation rate below 30% of your total limit to maintain a healthy credit score. Maintaining a low utilisation rate on your credit card also reduces the interest you accrue, making it easier to pay off your debt.

3. Pay more than the minimum

Paying back more than the minimum amount required by your bank or credit card issuer each month offers countless benefits. It reduces your credit utilisation rate, positively impacts your credit score, and tells lenders you're a responsible borrower who manages their debt well.

“It also helps you save on interest charges over time, allowing you to pay off your debt faster,” says Ndimande.

Below, Ndimande shares how to manage your credit utilisation rate effectively.

4. Protect your credit score

Your credit score is a numerical representation of your creditworthiness and plays a significant role throughout your life, from personal to professional.

Ndimande adds, “In today's competitive job market, employers often consider a potential candidate's credit score during the hiring process, as it can reflect their level of financial responsibility.

“Additionally, your credit score can influence your rental applications as landlords may view applicants with lower scores as high-risk tenants. So, being mindful of your score and improving it enhances your financial health and can open doors to countless career and responsible credit opportunities.”

Ndimande says Sanlam offers a free credit score check to help South Africans understand their credit profile. It provides access to a credit management coach, allows users to see how much they are paying on their accounts each month, track their account activity and interest rate payments, and check for suspicious activity to give them an accurate, holistic view of their financial position, to make better decisions with confidence.

Sanlam Life Insurance is a licensed financial service provider.
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