What Your Credit Rating Really Says About You
What your credit rating reveals about you, how credit bureaus calculate it, and the personal information creditors look at.
Published: Wednesday, October 19th 2016
Do you know what your credit rating is? If you’re like most, you have a general idea of how credit works: pay your debts on time and creditors will keep lending you money, right?
In South Africa, we are entitled to a free credit report every year from each of the two major credit bureaus, TransUnion and Experian. Annually, only about 1.6% of us actually request our free credit reports. That leaves a whopping 98.4% of SA consumers who possibly have no idea what their credit rating is. Or, what it reveals about you.
How Does Your Credit Rating Work?
So a credit rating, or a credit score as it’s commonly referred to in the US, is a number. This one number is a score between 300 and 850 (300 being the lowest score) that summarises for creditors how risky you are to lend money to. It’s also a general indication to lenders of how likely you are to honour future commitments and pay back the money. Your creditworthiness.
The score is informed by any and all of your positive and negative credit-related repayments and has been referred to as your ‘financial CV’.
But unlike your CV, you can’t edit it to highlight your strengths and obscure any weaknesses. It’s an automatic calculation made by all credit bureaus based on your credit behaviour. They keep stock of all of your negative and positive transactions. These are then weighed against each other to produce a score. So, where you’ve missed a payment, you haven’t ruined your life. One missed payment is compensated by your positive repayments.
Senior data analyst at credit bureau Compuscan, Jacobus Eksteen, said in an interview with MoneyWeb, that South Africans generally do not have great credit scores. Eksteen says a common misconception is that if you close an account, the bad credit behaviour on that account goes away.
“It’s taken into account for up to five years, depending on the credit bureau.”
What Do Creditors Look For When You Apply For Credit?
When applying for credit, whether it’s a mortgage bond, vehicle finance, or even a store card, creditors will evaluate not only your ability but your willingness to honour debt. According to Standard Bank, creditors can also look at the three Cs of creditworthiness.
The 3 C's Of Creditworthiness
The three Cs of creditworthiness are capacity, character and collateral.
Your capacity to pay back debt is worked out according to whether you’re employed and for how long. It also takes into account how much you earn, and what financial commitments and expenses you have.
Your character is, well, characterised by your credit history. The question of “Will you pay back the debt?” is literally answered by the question: “Have you paid back your debt?” Creditors will look at how often you’ve borrowed money, how much debt you currently have, if you pay your bills on time, and if you’re living within your means. Further than that, they also want to know how stable you are as a human being. In general. So how long have you been living at your current address? And do you change jobs often?
According to the National Credit Regulator, growth in unsecured lending went from R40 billion in 2008 to R172 billion in 2014. Collateral is what’s used as security for unsecured loans, so creditors can protect themselves should you defect on your commitment to pay them. So if you’ve got an asset, i.e. savings, property, etc. or even life cover that you can cede in the event that you fail to repay them, they’re more likely to lend you money.
Different creditors approach this information in different ways when making a decision to lend money. Some have high standards and lots of hoops to jump through. Some can also use different systems to rate you. So not all creditors rely strictly on your credit rating. Either way, keeping a good credit rating is vital for big loans like home mortgage bonds, so it’s better to keep it looking healthy.
Struggling to manage your debt from too much spent on credit? We can assist by putting you in touch with an expert debt counsellor who can work out an efficient payment structure and have you out of debt in no time!
Pay back the money. Pay it back on time. Credit bureaus stay up to date on your payment histories, any defaults or adverse listings, and civil court judgements against you. They keep that information for five years. So just try and avoid those, and you’ll be okay.