Building a healthy credit score
WE ARE OFTEN PARALYSED BY THE IDEA OF INVESTING, BUT BECOMING A SUCCESSFUL INVESTOR STARTS LONG BEFORE YOU MAKE YOUR FIRST INVESTMENT. IN THIS SERIES OF ARTICLES, FINWEEK DRAWS UP A ROAD MAP TO GET YOU FROM FINANCIALLY FLUSTERED TO INVESTING WITH CONFIDEN
It can be easy to give in to the t e mptation of opening t hat additional clothing account, or to get that credit card or personal loan to tide you over a financial rough patch. There’s also the addictive rush that comes with swiping the card to make purchases.
Of course, having numerous credit agreements with various credit providers is not necessarily a bad thing as long as you maintain a good credit record. But many people soon find themselves deep in the red, with their once-good credit profile going up in smoke in a matter of months.
We spoke to credit experts to help our readers start their journey towards a healthier credit profile and score.
National Credit Regulator (NCR) company secretary Lesiba Mashapa says t hat consumers defaulting on their contractual debt obligations, or a judgment being taken against them for not making payments, or a consumer taking on too much credit, usually works against their credit score. This is because these ref lect on their credit profile and the information is reported by credit providers and other service providers.
Accredited court annexed mediator at the National Debt Mediation Association Magauta Mphahlele says when credit bureaus create the score, they look at income and expenses and certain elements within a consumer’s credit profile.
“They look at how much debt you have and your repayment behaviour because on a monthly basis the credit providers record how and when you pay. The other thing they look at are public records – these are judgments, administration orders, and whether you are under debt counselling,” she says.
TransUnion is a credit bureau that collects information on consumers’ debts. Senior vice-president of TransUnion Analytical and Decision Solutions in South Africa Owen Sorour says that when making a decision on extending credit to consumers or not, credit providers use internal data in addition to data from the credit bureau to make an analysis.
He says based on credit behaviour, t here are various categories t hat a consumer will be classif ied as, i n terms of their debt repayment records. A consumer’s account can either be classified as good, if payments are made regularly and on time, or bad if payments
are skipped or made late. In some cases, a consumer’s profile is classified as being neither good nor bad.
SCO RI N G YO U R CR E D IT BEHAVIOUR
Sorour says score cards have positive and negative scoring and it’s about adding points for good credit behaviour like paying your account ahead of time or on time and regularly, and subtracting points for bad credit behaviours, like not paying on time or skipping payments.
Depending on t he t ype of loan a consumer wants to take up, it is common for the vehicle financer or bond originator to approach a number of banks to determine which one would offer the best interest rate.
When you apply for a loan, the number of enquiries you make are recorded with the bureaus. These enquiries will not have much of a weighting if you have a very good credit score, says Sorour, but if the credit score is at the margin then a few points are subtracted as a result of an enquiry being made and may have an impact on your credit application.
“What would happen if for instance a consumer shops around for the best interest rate, the credit bureaus will note that there’s an attempt to open five different accounts within a short space of time, and this may count against the consumer’s credit score.
“But from a consumer protection perspective, we don’t think that is a good thing because we encourage consumers to shop around,” says Mphahlele. And for certain credit agreements you should ask for a quotation and [if they give] you a quotation that sometimes lands as an enquiry because they have to look at your credit bureau report. We don’t think it is a good thing, but we don’t think it holds too much weight in terms of the credit score itself.”
DOES A DECLINED APPLICATION FOR VEHICLE FINANCING OR A HOME LOAN WORK AGAINST YOUR CREDIT PROFILE?
“The regulations allow for ‘enquiries’ against a consumer’s prof i le to be displayed for 18 months. The credit report will show the enquiry that has been made and t he reason for t he enquiry. The outcome of applications resulting from these enquiries are not ref lected on the credit bureau profile,” says Mashapa.
“Consumers should be aware that the decision to grant or decline credit is not made by the credit bureau but by the credit providers after considering all the relevant information including the credit bureau report,” he explains.
BUILDING A POSITIVE CREDIT PROFILE
To ensure that you build your credit profile, you need to make full payments to credit providers and should avoid defaulting on your accounts, says Mashapa. “Consumers should only take on debt that they really need and that they can afford. A good credit report can serve as an asset for consumers to negotiate better rates and conditions when they do decide to take on new debt obligations.”
Mphahlele agrees: “If you have a very good credit record, usually credit providers will offer you a lower interest rate, prime plus or prime minus – that is according to the risk they think they may be incurring. They might accept your loan application, but might increase the interest rate, or they might want a deposit for a vehicle or home loan.”
She says if you can’t pay the original instalment you should inform the credit provider. Each credit provider has its own criteria in dealing with this, some may arrange to reduce the instalment for a certain period and allow you to pay the monthly interest, while others may permanently restructure the account.
“But the problem is that consumers don’t know how to negotiate these things, they don’t know how to do a proper budget then they agree to things they cannot repay and that is why it is important to consult an expert. And people wait until it’s too late and the credit providers have taken action against them. Credit providers are very open,” Mphahlele adds.
She advises consumers: “It’s never too late to speak to your credit provider, at any point you can still talk to them, even when they have a court order. So talk to them or get an expert to assist you.”
Mashapa says that an increasing number of rental agencies are being registered with credit bureaus, who record whether tenants are paying their rent on time.
“Rental obligations payments can be reported to the credit bureaus. South Africa has a diversified credit bureau market that includes specialist credit bureaus with some focusing on the rental market,” he says.
Sorour says using rental payment behaviour to extend credit is currently not that prevalent due to limited data collected. However, this could change in the next 12 to 18 months.