This is what it takes to get the best credit rating
When it comes to buying a house or car, a bank would consider your affordability as well as your credit score.
Your affordability will determine how much the bank will lend you, but your credit score determines your interest rate, or whether the bank will even lend to you at all.
Having an excellent credit record and qualifying for a better interest rate could save you tens of thousands of rand.
According to TransUnion director Garnet Jensen there are five factors that influence your credit rating.
It is important to note that your personal information such as your employer, age, address and demographics have no bearing at all on your credit score.
THE FIVE FACTORS THEY DO CONSIDER:
- YOUR PAYMENT HISTORY: This is a 24-month history of all your payments. This shows whether you made your payments on time, if you were late or didn’t pay at all. If you miss payments, this will affect your credit rating.
- ANY ADVERSE LISTINGS: These are defaults (when you are more than three months behind), judgments and administration orders.
- NUMBER OF ENQUIRIES: This shows the number of enquiries by credit providers over the last 12 months. An increase in enquires could negatively affect your score.
- YOUR CREDIT PORTFOLIO: This shows the types of credit that you have, including secured and unsecured credit. This includes store cards, credit cards, vehicle finance and home loans. It also includes your credit utilisation. Using up all your credit lines could negatively affect your rating.
- LENGTH OF CREDIT HISTORY: This is the length of time that you have been actively using credit. The longer your history, the more positive for your rating.
HOW TO IMPROVE YOUR CREDIT SCORE
TransUnion shared the profile of an actual consumer with an excellent credit score
- They had no retail or clothing accounts. While one or two would not be a problem, too many clothing or retail accounts could be a negative.
- Their 24-month payment profile reflected one late payment on a credit card. Sometimes people forget to make a payment, a missed payment once in a while won’t affect your rating.
- They had four enquiries on their profile over 12 months. That is within an acceptable range
DEAL WITH THOSE ADVERSE LISTINGS: The most important factor is your adverse listing. If you have a default, judgment or administration order against your name, this will negatively affect your credit rating. An administration order will remain for five years.
A judgment and a default will remain on your profile for one year, or until “paid up”. The only way to remove these listings is to settle the debt or make it “paid-up”.
Once you have paid up the debt, the credit provider must send the information to the credit bureau within seven days to update the listing. The bureau then has seven days from receiving the updated information from the credit provider to update it on the credit bureau.
If this has not been done for any reason, you can contact the credit bureau call centre and provide them directly with the paid-up letter.
If the credit provider has not provided you with a paid-up letter, you can provide evidence to the credit bureau that the loan has been paid up.
The bureau will need to refer this to the credit provider for confirmation, which can take up to 20 business days.
If the credit provider does not respond within this period or confirms that it is paid up, the bureau will automatically update the information.
- Credit bureaus do not use demographics to determine a credit score. Race and gender have no bearing on a credit score. Bureaus do not include any information on the number of dependants either.
- The credit bureaus do not know your salary and do not use it for the credit rating. Where you work, or whether you are self-employed and how much you earn have no bearing on your credit score. A credit provider, however, will use this information to determine affordability.
- Credit bureaus have a free dispute resolution process for all consumers, so do not pay good money to a company that claims to do it for you.
IMPROVE YOUR PAYMENT HISTORY: The next factor is your payment history. If you are missing payments, it suggests you may not be managing your finances correctly or starting to run into financial difficulty.
For example, TransUnion had a case of a consumer who had been turned down for a home loan. He had multiple credit facilities, which were up to date and his existing home loan was nearly paid up. Yet he had started to miss payments on two loans.
He missed payment for two months on one loan and then in the following months missed three payments on another loan. This suggested he was starting to feel some financial pain and following the “pay something” strategy.
This often happens when people are struggling to meet all their repayments. They miss one or two payments on one loan, start to meet the repayments again but this time miss one or two payments on another loan.
While the credit provider may see it as a once off “blip”, the credit bureau payment history will have an overall view of the total payment profile, so it will be seen as a continuous cycle of missing payments.
To improve your payment history, you need to make sure you meet all your payments every month and that you pay your full instalment, unless you’ve agreed a reduced payment plan with the credit provider.
Your payment history will remain for 24 months, so it may take a while before your score is completely “clean”
Once you have lodged the dispute with the credit bureau, the credit bureau will refer the query to the credit provider who has 20 business days to respond.
Once the dispute is lodged, the negative listing is masked, and the account is flagged as “under dispute”. If the dispute is found to be valid, the dispute flag is removed, and the negative listing no longer applies.
However, if the dispute is not valid, the listing will be reinstated. The only other recourse that the consumer would then have is to lodge a complaint with the Credit Ombud.
If you have been a victim of ID theft and have fraudulent accounts listed on your credit report,, you need to request each affected credit provider to declare these accounts fraudulent and issue you with a clearance certificate.
It would take between 30-60 days to update on your credit report, alternatively you could use the dispute process to speed up the process.
Victims should contact the South African Fraud Prevention Services (SAFPS) to register the identify theft.
CHECK NUMBER OF ENQUIRIES: The number of enquiries on your credit record could send a warning signal to the bureau – but not necessarily affect your score. Any checks you make will not appear on your account. A query from your employer is also considered a “soft” enquiry and would not be considered a problem.
Enquiries from an insurer would also not be a concern to the bureau as this is commonplace when people are shopping around for a quote.
What credit providers are watching out for are multiple loan applications. A sudden increase of applications for loans by a consumer could indicate that they are starting to face financial difficulty.
From a consumer perspective, enquiries could also be a red flag for ID theft. If you receive enquiries from credit providers who you have never engaged with – your ID could have been compromised.
DON’T MAX YOUR CREDIT LINES: The type of credit, and your credit utilisation, will also affect your score. A spread of credit including “good” credit such as home loans and car finance would be considered a better risk than having only store cards or micro-loans for example.
It is also advisable that you do not max your credit facility and only use around 35% of it continuously.
For example, if you have a store card with a credit facility of R10 000, only use a third (R3 500) of that amount on a regular basis.
If you are at your maximum rate, paying off a small amount only to use it again would indicate a stressed consumer. Paying off your credit card in full each month would indicate a very healthy consumer.
CREATE A CREDIT HISTORY: One of the frustrating aspects of credit is that you need to have credit to get credit.
Store cards are not the only way to create a credit record. Insurance contracts are also included in your credit profile – this includes funeral policies, life cover and short-term insurance.
It is better to have just one credit agreement that you maintain well than having multiple accounts which you fail to repay.
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