Understanding your credit score

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understanding your credit score

If you’ve been declined for a personal loan or a dream job, it could have something to do with your credit score. Samke Mhlongo explores why that is and how you can avoid it.

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One of the clips from a #BONAMoney livestream went viral on social media, and in it I answer which debit orders affect your credit report when missed and which ones don’t. So, being the kind-hearted person that I am, I decided to dedicate a full column on this topic for those who may have missed it.

WHAT IS A CREDIT SCORE?

A credit score is a reference on how well you manage your monthly debt and service repayments. It is used by credit providers (e.g. clothing stores and banks) and service providers (i.e. Vodacom, Multichoice, insurances) to determine how well you will pay for the credit or service that they offer and helps them decide on the best offering to approve for you. Credit scores are also important when you’re looking for a job. Recruitment specialist at Paton Personnel, Mapule Malau says: “During the recruitment process, we consider a candidate’s credit profile as this tells us about their accountability and level of responsibility.”

HOW IS IT CALCULATED?

I am about to give away all my coaching secrets here, but because I appreciate you being our reader, I’ll share my insider tips. PS: Don’t show this to anyone that is not a BONA reader. Lol!

  1. Length of credit history

The longer you have a good credit history for, the higher your score. Remember, you start on an average score and based on your conduct, you either build it up or bring it down.

TIP: If you are looking to buy a car or a home, start building your credit history at least 6 to 12 months before making the application.

  1. Repayment profile

This one is easy, the more payments you make on time, the higher your score. The more payments you make late or miss, the lower your score.

TIP: Set up debit orders for your monthly obligations instead of opting for manual payments on expenses such as your bond, car, insurances and loans.

  1. Percentage credit used

If you were building your credit score, which consumer would you rather be:

  • Consumer A – R5 000 credit card facility owing R2 500 or
  • Consumer B – R 1 000 credit card facility owing R900?

If you chose Consumer B you would be wrong because although the credit limit and balance owing is lower, the percentage credit used is much higher (90%) versus that of Consumer A (50%). The credit scoring system sees people that are maxing out their credit lines as living beyond their means and this negatively affects their score.

TIP: When repaying your debt or building your score, try not to lower your credit limit with every payment you make, otherwise your percentage credit used will always be high and it will take you longer to rebuild your score.

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  1. Negative information

The higher the number of late payments, missed payments, defaults and judgements you have on your report, the worse your score.

TIP: Don’t avoid taking calls from the service providers you owe or are in arrears with. Rather, make a payment arrangement with them for the amount you can afford to repay, as this will prevent them from listing a default or judgment against you.

  1. Number of enquiries

Finally, the credit bureaus get notified every time you apply for credit (through the formal channels, not mashonisa) and the higher the number of enquiries, the lower your score. Why? Because the credit scoring system interprets your high number of enquiries as a sign that you are in financial distress and need large sums of credit to survive.

TIP: When shopping for credit, always start with your bank. Only use a finance originator once you have tried to get the finance yourself, otherwise you may be lowering your score and chances of getting good credit.

 The truth is, as much as we want to make all our payments on time, life happens and leaves us having to make difficult choices, such as choosing which payments to miss in order to bury a loved one or help with registration fees and the likes. If you do find yourself in that situation, then you can take a quick look at this list to help you decide how to allocate your funds best:

WHAT AFFECTS YOUR CREDIT SCORE?

  • Credit card
  • Store account
  • Phone and Wi-Fi contracts
  • Personal and home loans
  • Car finance
  • Multichoice

WHAT DOESN’T AFFECT YOUR CREDIT SCORE?

  • Overdraft
  • Life and car insurance
  • Medical Aid
  • Funeral Cover
  • Unit Trusts
  • School fees (some now do, so double-check)

WHAT IF YOU DON’T WANT CREDIT?

Many people I have encountered have complained that the traditional scoring system traps them into taking out credit for things they don’t need. Because you will need some form of unsecured credit (store card, credit card, personal loan) before being approved for car finance or a home loan. In response to this, global credit bureau TransUnion, has come up with an innovative system that considers your holistic payment profile, and not only those repayments made on credit products. Lee Naik, CEO of TransUnion SA, says: “CreditVision is a sophisticated computing system that considers a client’s spending patterns to predict how that consumer will behave with credit, even if they’ve never had it before.” I’m certainly happy to see that the oftentimes rigid world of banking and finance is now changing its thinking to better meet the needs of its consumers. I long for the day when the reason why we missed a payment is taken into account in credit scoring, but until that day, we use the tips available to us as we keep soaring to greater financial heights.

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