Understanding the Credit Process: A Key to Financial Fitness
Category Property Advice
In an era of rising living costs, the thought of applying for a home loan or any other form of finance can be intimidating. However, it is crucial to grasp the workings of the credit process, the factors that determine creditworthiness, and the interest rates offered. This knowledge is vital for maintaining your financial well-being.
You may have come across the terms "credit score" and "credit profile" before, but understanding their true meaning is essential because financial institutions utilize them as deciding factors when you apply for credit.
Your credit score is an assessment of the likelihood of defaulting on a loan. Financial institutions can only thrive by extending credit to borrowers who can repay their debts. Therefore, comprehending the significance of your credit score and profile is crucial.
Certain individuals consistently meet their monthly repayments, while others may be slow in doing so, and some unfortunately default entirely, failing to repay the money they borrowed. Financial institutions are strongly motivated to distinguish between debt that will be repaid and debt that may not be.
So, how do they determine who is a good prospect and who is a risky one?
They rely on credit vetting systems that consider applicants' repayment history behaviors and other proprietary factors to predict the likelihood of future repayment.
In South Africa, the two major credit bureaus are TransUnion and Experian, with other players in the market including XDS, CPB, and VeriCred.
With approximately 23 million active credit users in the country, each of them will have a credit score at some point after opening a credit account, such as a cell phone contract, credit card, or personal loan. People under the age of 18 cannot apply for credit in South Africa and therefore do not have a credit score. Additionally, many individuals choose not to have credit later in life, which means they have no accounts for credit bureaus to assess.
A credit score is a summary of a consumer's repayment behavior over time. It assigns a numerical value to the individual's credit profile. Each credit bureau employs its own scoring system, but for the purpose of this article, we will use a range of 0 to 900.
A poor credit score falls between 0 and 680, a fair score ranges from 681 to 750, and a good score is anything higher than 751.
The two most significant factors influencing your score are the consistency of debt repayment and the outstanding balance on existing debt. Other factors include the mix of accounts (loans, credit cards, cell phone contracts, etc.), the age of the accounts (how long they have been active), and any newly opened accounts.
Your credit score assists creditors in deciding whether to grant you credit and what interest rate to offer. It also affects a bank's decision when you apply for asset finance, such as a home or car loan.
Actions to Improve Your Credit Score
The most crucial step is to pay your accounts on time.
The second most important action is to regularly check your credit report to ensure that it accurately reflects your payment history.
If you pay your accounts every three months, they may appear "up to date." However, they will still be marked as delinquent four times a year since the accounts are only being paid after 90 days. This lowers your credit score and sends a signal to creditors that you are a high-risk client.
Paying your accounts on time each month not only helps you avoid defaulting but also boosts your overall credit score.
Lastly, there is a catch-22 situation: having more credit accounts can actually have a positive impact on your score. This demonstrates to other creditors that you are creditworthy, and maintaining low credit exposure indicates that you are responsible and reliable. However, it's important to note that this doesn't mean
Author: Harcourts Summerton
