Skip to content
, ,

How owing money can impact your credit score

Does owing money affect your credit score?

When it comes to your credit score, owing money can have a significant impact. Your credit score is a numerical representation of your creditworthiness, and it is used by lenders to help determine whether or not to approve you for credit.

When you owe money, especially if you have high levels of debt, it can lower your credit score. This is because it signals to lenders that you may not be able to manage your finances effectively, making you a higher risk borrower. 

Did you know: the amounts you owe (the debt you have) makes up 30% of your credit score. 

Does debt increase your credit score?

You won't have a credit score if you don't have any debt, so in the initial phases of building your credit score, having some debt, and showing that you can make payments on time, does increase your credit score. However, too much debt will decrease it and you will be seen as a risk to creditors.

What affects your credit score the most?

my My debt is paid up but I cant get hold of my Debt Counsellor (Instagram Post (Square)) (LinkedIn Post) (11)

The factor that contributes the most to your credit score is your payment history. This is basically a record of your ability to make your monthly payments on time each month. Your payment history comprises 35% of your total credit score. 

What are the 5 factors that affect your credit score?

 Payment history (35%)

  • As was mentioned in the previous paragraph, your payment history is the most important factor when determining your credit score. A missed or late payment could stay on your credit report for up to 7 years. This is why it's very important to ensure that you make your payments consistently and on time. 
  • If you're worried about missing a payment because you don't have enough money to pay for all your bills, you may be over-indebted. 

Read: How do you know if you're over-indebted?

Amount owing (30%)

  • The total amount of debt you have affects your credit score. What is equally important is how much of your credit allocation you've made use of. This is referred to as your credit utilisation ratio (utilisation rates). Your credit utilisation ratio then is simply the amount of credit available (credit limit) to you and the portion of that credit that you actually use. 

Length of your credit history (15%)

  • The longer you've had your debt will contribute to you having a better credit score. This is because it shows that you have more experience managing your debt. 

Your credit mix (10%) 

  • This refers to the different types of credit accounts you have, such as credit cards, loans, and home loans. Having a diverse credit mix can be beneficial for your credit score, as it shows that you can manage various types of credit responsibly. Lenders like to see a mix of credit accounts as it demonstrates your ability to handle different financial obligations. However, it's important to note that this factor only makes up a small portion (10%) of your credit score, so it's not as significant as your payment history or the amount owing. Nonetheless, maintaining a healthy credit mix can still have a positive impact on your overall creditworthiness.

New credit (10%)

  • When it comes to your credit score, opening new credit accounts can have an impact. This factor makes up 10% of your credit score and includes things like the number of new accounts you've opened recently, the number of recent credit inquiries, and how long it has been since you opened a new account.
  • Opening multiple new credit accounts in a short period of time can be seen as risky behaviour by lenders, as it may indicate that you are in financial distress and are seeking credit to cover your expenses. Additionally, each credit inquiry made when you apply for new credit can temporarily lower your credit score.
  • On the other hand, responsibly managing new credit can have a positive impact on your credit score over time. This includes making timely payments on new accounts, keeping credit card balances low, and only opening new accounts when necessary.
  • Overall, while the impact of new credit on your credit score is relatively small compared to other factors, it's still important to be mindful of how opening new accounts can affect your overall creditworthiness.

What is a good credit score?

It's important to note that your credit score can change slightly depending on the credit bureau you request it from. 

In terms of Experian's credit score range, it's crucial to aim for at least an average risk level of 611-628, with the ultimate goal being a low-risk status of 660-750.

500 - 594: Considered very high risk

595 - 610: Categorised as high risk

611 - 628: Represents an average risk

629 - 659: Indicates a low-risk profile

660 - 750: Reflects a minimum risk level

 How can you improve your credit score?

Improving your credit score is essential for your financial health and can open up opportunities for better interest rates and access to credit. Here are some tips on how you can improve your credit score:

1. Make payments on time: Your payment history is the most important factor in determining your credit score. Ensure that you make all your payments on time, as missed or late payments can negatively impact your score.

2. Reduce your debt: The amount owing makes up a significant portion of your credit score. Aim to reduce your overall debt and keep your credit utilisation ratio low. This shows lenders that you can manage your finances responsibly.

credit utilisation ratio

3. Maintain a healthy credit mix: Having a mix of credit accounts, such as credit cards, loans, and mortgages, can positively impact your credit score. Make sure to handle them all responsibly to show that you can manage different types of credit.

4. Be mindful of new credit: Opening multiple new credit accounts in a short period can be seen as risky behaviour. Only apply for new credit when absolutely necessary and manage it well. 

5. Check your credit report regularly: Monitor your credit report for any errors or discrepancies that could be affecting your score. You should contact the credit bureau in question if you find any errors. 

By following these tips and being consistent in managing your finances, you can improve your credit score over time and strengthen your financial standing.

Debt counselling can help you improve (rehabilitate) your credit score

Debt counselling can be a valuable resource for individuals struggling with debt and looking to improve their credit score. By signing up for debt counselling at Meerkat, you can work with a registered Debt Counsellor who will assess your financial situation, create a personalised debt repayment plan, and negotiate with creditors on your behalf.

Through debt counselling, you can consolidate your debts into a single, manageable monthly payment, which can help you stay on track with your payments and avoid further damage to your credit score. 

Debt counselling can be a proactive step towards paying off your debt, improving your credit score, and ultimately achieving financial stability. If you're feeling overwhelmed by debt and unsure of where to turn, you should definitely consider debt counselling. 

Find out more about debt counselling in this blog post. 

Who is Meerkat?

Meerkat is a financial wellness company that wants to help South African consumers do MORE with their money. We can help with debt repayment negotiations, provide affordable insurance and help you kickstart an emergency fund
Fill in the contact form on our website to receive a free callback from the Meerkat team today.

Let us contact you

Enter your details below and we will contact you shortly


Let's get to know you better

Quick Quote Funeral Cover