Use your credit card to build your credit score

 

You might not be aware that you have a credit score, which influences your ability to get affordable credit. Take 2 minutes to read up about it – it’s time well spent.

How much credit you use matters

One of the key measures that contributes to your credit score is your credit-use ratio. This measures how much of your available credit you are currently using. So, if your credit card limit is R10,000 and you are struggling to use less than R8,000 of this limit, this can have a negative impact on your credit score. A good rule of thumb is to use 30% or less of the credit you have available on your credit card.

 

It’s all in the timing

It may sometimes feel like maintaining a ratio of 30% or less is impossible. But here’s how you can get closer to that number, even if only temporarily.

The idea is to lower your debt ratio, which is the ratio credit bureaus use to measure your level of debt, when you get your monthly statement, which is usually on a set date every month. If you have a bit of extra money, you can also save on interest by making a double payment or paying more than the minimum amount.

Managing your debt is one of life’s responsibilities that you get better at the more you do it


The trick is to make an extra payment a couple of days before your payment due date. In other words, you would make your usual payment after receiving your statement, and then another payment just before the next statement is issued.

What this does, is lower your debt ratio at the time your statement is issued. This strategy does rely on you having enough to make double payments every month. But if you can afford that, it will save you interest in the long run while boosting your credit score.

Other strategies

There are a few other ways to improve your credit score. This next strategy is based on establishing a track record of consistently paying bills and managing your debt.

If you do not qualify for a credit card, get a secured or prepaid credit card. As the name suggests, you deposit your money into the card, which you can then use like a normal credit card. And when you do use the card, you then make monthly payments to restore the ‘credit’ on the card to the original balance.

Lastly, you can ask for your credit limit to be raised. Not only will you have more credit in case of emergencies, but a higher limit will lower your credit-use ratio.

Here’s how it works: If you had a R10,000 balance on a card with a R25,000 credit line, then your credit-use ratio would be 40% – too high for comfort. By doing nothing more than raising your credit limit to R30,000 or R35,000, your credit ratio drops to 33% or 29% respectively.

Whether you can raise your limit, of course, depends on your credit score and the bank’s assessment of your ability to pay back a larger amount – even if you’re never planning to use the full credit limit you are given.

Managing your debt is one of life’s responsibilities that you get better at the more you do it. Arm yourself with knowledge about debt, and your credit card will become a tool you can use to improve your life.