Economic challenges have led to credit reliance and irresponsible credit behaviour, causing low credit scores among South Africans. Rynhardt de Lange from Milaw Legal explains and offers solutions.

24 October 2023: Inflation recently increased to 5.4% from 4.8% in August, leaving many South Africans in further financial trouble having to rely on credit to make ends meet, even when they cannot afford it. TransUnion data reveals that while more South Africans took out new loans in the past quarter, the amounts they owed increased by 8.1% compared to the previous year. This increase in debt has resulted in more people falling behind on their payments, which, in turn, can seriously harm their credit scores.

This is according to Rynhardt de Lange, Director and Head of Legal at Milaw Legal, who said that a poor credit score can bring about significant challenges, such as obstacles in securing loans with elevated interest rates, restricted choices for renting, higher insurance expenses, and even potential hurdles in securing specific job opportunities.

“With the string of economic challenges that South Africans faced this year, it is not surprising that many consumers are lagging behind on their credit commitments; however, people often overlook the domino effect that this can have on their credit scores and lives,” said de Lange.

De Lange highlighted the following factors as leading causes for low credit scores among South Africans:

New to Credit Market

According to the latest Eighty20 Credit Stress Report, approximately 665,000 individuals joined the credit market this quarter, bringing in a total of R7.9 billion in new loans for the year. Furthermore, on average, 115,000 South Africans exit debt review annually, either because they've successfully paid off their debts or are no longer considered overindebted. When these individuals return to the credit market, they often find themselves starting with a credit score of zero, which requires a fresh start. This newness to the credit scene is a common factor contributing to low credit scores.

De Lange recommends starting small by taking on affordable amounts of short-term credit, such as retail store accounts and credit cards, to build a well-managed credit record. If managed responsibly, these accounts can be beneficial in improving one's credit score.

High Credit Card Balances

Another significant factor contributing to South Africans' low credit scores is the presence of high credit balances, de Lange highlights. TransUnion's data reveals a concerning 9.2% year-on-year increase in outstanding credit card balances within South Africa, especially notable in the super prime risk tier. Your credit utilisation ratio, representing the portion of your credit limit that you use, wields substantial influence over your credit score. Experts recommend keeping this ratio below 30% by not exceeding 30% of your credit limit on any card.

“The good news is that you have the power to influence your credit score directly. For instance, when you pay off a credit card with a substantial balance, your credit score can see an improvement once the payment gets reported to the credit bureaus,” said de Lange.

“To explain this, your credit score is calculated by taking the total outstanding balance on your accounts and dividing it by the sum of your credit limits. Then, this result is multiplied by 100 to express it as a percentage. It's important to note that both your individual account usage and the overall utilisation rate across all your accounts play a role in determining your credit score,” said de Lange.

Missed Payments

Many South Africans also struggle to keep up with their debt repayments every month for a variety of reasons, de Lange noted. Findings from the NedFinHealth Monitor study, a comprehensive research effort by Nedbank and the Financial Health Network involving 1,503 South Africans, shed light on the financial realities, aspirations, and challenges of respondents. Regardless of their income levels, 42% of those surveyed acknowledge the struggles they encounter in managing their debts.

"Your track record of timely bill payments plays a pivotal role in how credit bureaus assess your credit score. Even a single payment that's 30 days or more overdue can significantly harm your credit rating. What's more, these late payments can linger on your credit report for as long as seven years," explained de Lange.

Recent Credit Applications

New credit applications have a notable impact on declining credit scores, and South Africa has experienced a rise in applications across various credit products, even amid high-interest rates, according to the latest TransUnion Industry Insights Report. “Every time you apply for a new credit card or loan, it can cause a slight dip in your credit score. This reduction occurs whether you accept the offered credit or not," explains de Lange. “The reason behind this lies in the perception of multiple credit applications as a higher risk, indicating a lower likelihood of complying with repayment terms, ultimately resulting in a diminished credit score," he said.

A Non-Diverse Credit Profile

Finally, unsecured debt, devoid of collateral, is the most prevalent and often the only type of credit South Africans have on their profile. This is a common occurrence as people in South Africa frequently turn to loans and credit cards to meet vital needs, such as groceries and transportation. This situation is exacerbated by the tough economic conditions. De Lange explains how this lack of diversity in their credit profiles is another reason South Africans credit scores stay low.

"If most of your credit history revolves around a single type of credit, it could have a detrimental impact on your credit score. For instance, revolving credit accounts, like credit cards, involve varying balances each month, whereas instalment credit accounts, such as car loans, mortgages, or student loans, feature fixed payments and structured terms,” said de Lange.

"Recognising the elements that lead to poor credit scores is essential for South Africans aiming to bolster their financial health. By responsibly managing their credit, lowering credit card balances, ensuring punctual payments, and diversifying their credit portfolio, individuals can boost their credit scores and open doors to better financial prospects," de Lange advised.

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About Milaw Legal

Milaw Legal is a debt management company committed to empowering South Africans in their battle against debt. With over a decade of expertise in financial services, the organisation offers a range of high-calibre debt relief services tailored to meet each individual's unique needs, including debt review removal, judgment removal, and affordable distribution. Guided by values of integrity, empathy, and innovation, Milaw Legal provides personalised and comprehensive legal services, ensuring clients achieve financial stability and long-term success.