The importance of a good credit rating

Proper financial planning is key to building your credit score

Reuben Van Niekerk
Consumer advice
car shopping
credit rating
credit score
vehicle finance

When applying for financing to purchase an expensive item like a car, one of the first things that the finance provider will check is the status of your credit score. Your credit score is determined by your credit history as well as your ability to pay back loans on time. Your credit rating will affect the amount of credit a finance house will lend you as well as the interest rate you will be offered on that repayment loan.

If you are a recent graduate that is entering the working world, a new or used car will be a priority in becoming mobile and starting your career. However, you will have no credit history if you have never applied for finance, had a credit card or retail store account. While living debt free, especially in the current economic climate is a good idea, it can negatively impact on your credit score.

A good credit score will mean that you are more likely to get a better deal on a bank loan. A poor credit score will indicate to the financing institution that you are a potentially high-risk customer. If your loan is even approved this may result in them offering you a higher than average interest rate or a limited loan amount.

If your first loan application is not succesful, it is a good idea to review how you are spending your money before applying for another loan.

You could also ask why your loan was turned down and this could help you prepare better for future applications.

 A loan refusal could be budget related, meaning that you don’t have enough free cash after honouring your monthly commitments or you might not be able to afford the car you want right now, according to your income.

When doing these calculations it is important to remember that your car payment should not take up all your disposable income as there are also other costs when it comes to vehicle ownership such as insurance, fuel and maintenance that need to be budgeted for.

Online finance calculators like the one provided on will assist you in calculating what price range of vehicle you are able to afford with your current salary and monthly commitments.

Improving your credit rating

A great way to improve your credit score is to close accounts that are not essential and only apply for credit when you are looking to buy a car or a house.

Always pay your bills on time and pay atleast the minimum amount owing, this goes for all your accounts including rent, rates and taxes and your cellphone.

If you do have a retail store account or credit card, these accounts can be used to make small purchases. But it is important to repay atleast the minimum amount owing on each of these cards at the end of each month. A credit card can help you build credit if you use it responsibly as it gives you the ability to buy now and pay later, which is a great way for you to showcase how you manage your debt versus income within your budget.

Opening a bank account and managing it effectively, will also count towards establishing a good credit history.

Credit is needed to build credit but it takes time. For example making several credit applications in a short period of time might do more harm than good, as it could appear that you are taking on too much debt.