Expert tips for prepping your credit score for a bond application

We all understand the importance of maintaining a good credit rating and most people try to do so, but many fall short when they apply for sizable loans like bonds and are often surprised when a credit check throws up negative results and their applications are declined.

And it’s often due to seemingly minor things counting against them, including regular late payments of monthly debt and unresolved disputes with companies, regardless of whether they’re in the right or not.

Even if you’re financially stable and generally credit-worthy, your plans could be thwarted by long-forgotten accounts like dentist’s bills, which could have been innocently overlooked because of circumstances like moving house.

And, although they may have originally been small amounts, penalties and legal fees can escalate the amount owing and sometimes there is even a judgement against you of which you are unaware.

Banks will require proof of income as well as an income and expenditure statement to show that there is sufficient net surplus income to service the bond once all existing debt commitments and household expenses have been met.

And as banks are legislated by the National Credit Act to only advance credit to consumers who have a good credit record and have proven ability to repay debt responsibly, a bad credit record is literally a deal-breaker

Knowledge is key when it comes to managing one’s credit

Quite simply, the better you understand what a credit rating encompasses and the more you know about what impacts your credit score, the easier it will be to maintain a good one.

Your credit record is held by the credit bureau and it’s a detailed report of your credit history and repayment which includes everything from home loans to cell phone contracts and dates back to your very first line of credit. It also includes which organisations have enquired about you.

All this information yields a credit score which is an indicator of your creditworthiness and ability to repay debt.

But, although the two most critical requirements are a good credit score with a track record of repaying contractual debt responsibly and being able to afford the monthly bond instalments, banks also take several other factors into consideration.

Critical factors to consider

1. High but unused credit:

Most people would expect that having high but unused credit available on retail accounts and credit cards would count in an applicant’s favour, but the opposite is true.

The reason for this is that banks will automatically include the potential instalments on these unused credit facilities in their affordability calculation, with the rationale being that the applicant could at any stage max out his/her credit facilities.

So before applying for home finance, if you have unused or seldom used credit facilities with high limits, it’s advisable to either reduce the limit or close unused accounts in order not to prejudice affordability for a bond.

2. Limit finance applications to only the necessary:

Too many credit inquiries, whether they be for a credit card or a loan, can negatively impact your score and could be regarded as a red flag.

This is one of the key benefits of using a bond originator when shopping around for the best rate as, being service providers rather than credit providers, they leave no footprint.

3. Settle as much debt as possible before applying for a bond:

There is a difference between qualifying for credit with regard to gross income and affordability, both of which the banks take into consideration.

But, as a rule of thumb, the larger the margin between gross income and expenses, the better the rate applicants are likely to be offered.

Which also makes it important that you don’t incur additional debt before you apply for a bond. Rather buy the new car after your new home.

4. Pre-qualification:

If you are thinking of buying property in the near future, consider getting a head start on the financial application before even beginning the search for your dream home through pre-qualification with a bond originator like ooba.

Pre-qualification not only gives prospective homebuyers the necessary information about their credit record, it also arms them with the knowledge of how much they can afford to spend, how much they should save for a deposit and the type of bond deal they can expect from a bank.

Even if you aren’t yet ready to buy property, these days a good credit score is equally important in the rental sector and it can be very difficult finding a home to rent if one is regarded as high risk.

And, although a tenant’s credit score is not necessarily an accurate indicator of how reliably they will pay their rent, unfortunately it’s the only way agents have of gauging potential payment behaviour.

The best way to establish a good credit score is consistently and over time, starting with small accounts like store credit and cell phone contracts and, if possible, include a credit card in the mix as banks will monitor how you manage it. But don’t splurge on it because the higher your credit card balance in relation to your credit limit, the worse your credit score will be.

Keep your debt low and always pay on time, paying more than the minimum instalment when possible.

Although the Credit Amnesty Bill implemented on 1 April 2014 stipulates that credit bureaus must now automatically remove paid-up judgments and paid-up adverse information listings, banks still have access to payment profile information which displays payment histories.

So, if you have negative information on your credit report, there is unfortunately no quick fix as your credit score is influenced by your payment profile behaviour over the previous 24 months, so all you can do is pay your bills on time and be patient.