Opinion Piece: What’s your score?
Most people see credit as a means to an end. It enables us to purchase something when our budgets are stretched, or alternatively to fund a big-ticket item that exceeds our cash flow. Credit also plays a significant role in building wealth. Used wisely, credit can assist us in buying a home, funding education or taking advantage of other opportunities to grow our wealth portfolios.
However, access to credit is not afforded to everyone - creditworthiness has to be earned. Banks and other lending institutions have strict criteria to ensure that you can afford to pay back the loan and that you have a good track record of paying your bills on time. If you do not meet these basic conditions, your chances of obtaining a loan decrease.
A credit bureau plays a significant role in the facilitation of credit, as it provides potential lenders with a view of individuals as a credit risk. However, it is also up to us as individuals to keep our own credit profiles healthy. By understanding your role, you can ensure that you will always have access to credit when you need it most.
Your ability to qualify for credit is linked to your income, expenses, how you pay your debts and how much debt you currently have. All of this information is recorded in your personal credit report and stored at credit bureaus.
The more negative information that appears on your report, the less likely you are to get credit - even if you can afford it. Very few people realise that the way they pay their bills affects their credit score. You may think that being a few days late or missing payments for a month or two will not make a big difference, but the reality is that such habits can negatively affect your credit rating, which can mean you may not be granted credit when you need it.
Paying bills on time has an enormous influence on your credit score, and is one of the biggest influencers of whether or not you will qualify for a loan. A credit score takes into account insolvencies, creditor judgments and defaults.
The good news is that this information will not reflect on your record indefinitely. It can be listed on your record for a period of up to five years, but if you pay the debt off it will be removed, as a result of the recent credit amnesty.
Another important fact to consider is that if the institution you borrowed money from goes into liquidation (ceases to operate), you are still obliged to settle your account or loan with them. If you have a loan with a bank and it is bought out by another bank, or it is closed down, the administrators or liquidators may be entrusted with the collection process. If you default on your payments, your credit record may still be negatively affected. In other words, just because an organisation fails, it does not mean that you will be relieved of your obligations.
If you have taken the trouble to ensure that your bills are paid on time, you have taken the first step that can help ensure a favourable credit score. This means that provided you can afford the repayments, getting access to credit should be relatively easy.
If you are unsure of where you stand in terms of your credit score, a free copy can be obtained from one of the credit bureaus. This will benefit you by enabling you to understand your credit health from the point of view of potential creditors. It will also enable you to pick up on any signs of fraudulent activity or identity theft. Free credit reports are available once in a 12-month period, and due to the growing problem of identity theft in South Africa, users are advised to check their credit report at least once a year.
Should you discover any issues with your report, as a consumer you are within your rights to contact the organisation that may have posted negative information on your profile, and ask them for detailed information. If your report looks weak, you can take steps to begin to repair it, such as ensuring your bills are paid on time. The bottom line is that your behaviour when it comes to paying your creditors has to be above reproach - if you keep your credit record in good shape, you will be rewarded with access to credit when you need it and perhaps even a lower interest rate.