Every person who applies for credit, whether a housing loan, clothing account or a short-term loan like those offered by payday loan providers and other short term lenders like wonga.co.za, will be credit checked. Some 19 million South African consumers make purchases using credit provided to them by a range of credit providers. The single most important factor in the granting of credit is your credit record, or credit score. For this reason, a good credit score is one of the most valuable tools an individual has to empower themselves financially.
Understanding a Credit Report
Credit reports are drawn up by credit bureaus. The information used to compile these reports is supplied by credit providers, usually every 30 days.
The most important part of the credit report is the payment profile or account history which typically spans a 24-month period and shows all the accounts that you pay in full and on time, along with late or skipped payments.
Defaults that are more than three months in arrears and where the credit provider has noted that a consumer is in default, are also reflected on the report. Defaults can be noted even if there is no legal action pending against the defaulted consumer. The report also records where an individual has applied for credit and how often in the past 24 months, and any judgements against them.
The credit provider uses this information to determine an individual’s creditworthiness in order to decide whether or not to give that consumer credit.
It is estimated that a mere one percent of credit active consumers in South Africa regularly check their credit reports to make sure that they are an accurate reflection of how they manage their debt. Accordingly to the law, every consumer is allowed to request a free credit report from each of the credit bureaus every year. If an individual would like to see their report on a more regular basis, they will be charged a nominal amount. There are three credit bureaus able to supply these reports in South African: TransUnion, Experian and XDS.
It should also be kept in mind that it is not only credit providers that access an individual’s credit report – employers, insurance companies and potential landlords (amongst many others) will use this information to make a decision about whether to give a person a job or extend insurance to them. In fact, insurers are legally required to access an individual’s credit records to define their risk category and this, in turn, determines the insurance premium they will pay.
It is, therefore, critical for a person to know their credit score. Understanding how this score is calculated can help a person to understand and correct any financial behaviour that could have an effect on their credit life. A good credit score will also allow them to negotiate optimal interest rates with financial institutions which, in the long run, will save the consumer substantial sums of money over time.
It is also an excellent way to look out for suspicious or fraudulent activity using an individual’s credit lines. For this reason, if a person picks up any information like incorrect address details, credit applications or any other information they cannot verify, they should immediately investigate the matter further with their credit provider and notify the credit bureau for correction.
Calculating a Credit Score
When calculating a credit score, a consumer’s overall payment history is taken into account, along with any outstanding debt and their total number of creditors. A number of other factors also affect the final score: how a person applies for new credit, the time lapse between applications and the type of credit applied for like store accounts, personal loans such as those offered by payday loan providers, credit cards or vehicle financing. All these factors are calculated using a rigorous credit rating formula which results in an end score.
When a consumer requests their credit report, their rating will fall into a 501 to 990 range, with higher scores representing a lower likelihood that the consumer will not pay back his or her debts. Along with this score is a letter grade (A to F) which allows the individual to see how lenders view them and how they compare with other consumers.
How to Improve a Credit Score
The best way to improve a not-so-favourable credit score is by paying accounts on time. In difficult times, if a consumer is unable to pay the full amount, they can negotiate a lower, more manageable premium with their creditors. Consistency is another way to improve a credit score. The consumer should make sure that they always stick to their payment arrangements or immediately contact their credit providers.
A good score not only makes an individual more likely to get the competitive edge when applying for a job or home loan, it will help them on their way to achieving their financial goals.