What's a credit score and what does it tell lenders about you?

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Many South African consumers have no other choice but to use credit to pay for basics such as food every month.
Many South African consumers have no other choice but to use credit to pay for basics such as food every month.

At a rate of 32,6% unemployment, South Africa in the first quarter of 2021 recorded its highest joblessness rates since the quarterly labour force survey began in 2008.

And with a traditionally poor savings culture, given SA's historical income inequality, many of are struggling to maintain good credit records and are heavily reliant on debt. But what does this mean for your credit score?

By last December, almost 40% of South Africans with credit could not regularly meet their debt repayments, according to the NCR’s Credit Bureau Monitor. And, of the 38,7% of credit-active consumers who were in arrears by December, 23,4% were three months in arrears.

This shows many South Africans are forced to make heavy use of financial products such as loans and credit cards despite the devastating effect the misuse of these products can have on their credit scores. These are the basics.

What is a credit score?

Every adult who’s ever used credit will have a credit report from credit bureaus, which must be registered with the National Credit Regulator (NCR) – ncr.org.za.

Your credit score tells people whether you repay your debt on time The bureaus will give you a score calculated according to your financial history, including loans and repayment habits. Credit providers such as banks use this score to determine if you’ll be a good candidate for a loan.

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How is it calculated?

Although credit scores may differ, it’s usually expressed in a number anywhere between 0 and 999. Credit bureaus  use different methods of measuring your credit score – for example, some limit their credit score at 700 points, and others set the limit at 500. 

But all of them will increase your credit score if you pay all your accounts on time, and decrease your score if you pay late or not at all – so the lower your score, the smaller your chances of getting a loan.

"Your Credit Bureau score," according to consumer credit reporting agency TransUnion, "is designed to show you, by way of a number, the strengths and weaknesses of the information in your credit report."

Basically, your score "shows you how your credit standing compares with other consumers".

How does it work in real terms?

Let’s say you want to apply for a home loan, for example, but your credit record shows you’ve fallen behind on payments and you have many loans. Lenders will consider you a bigger risk.

Your home loan might be granted but it could be for a smaller amount than you’d hoped because the lender can see how much collective debt you have and that you struggle to pay.

What's on my credit record?

In addition to your credit score, your record contains both personal and professional information. 

The personal information that's included in the record

  • Your name;
  • Address, (current and previous);
  • ID number;
  • Telephone numbers;
  • Marital status, and
  • your spouse’s information.
  • The professional information that's included in the record

    Your employment status will be available, which covers your current employer, your position, as well as information about previous employers and your positions there.

    What does my record tell prospective lenders and employers about me?

    Your credit history will show if you’ve ever received any late-payment notices; which financial services providers or lenders have enquired about you; as well as every loan or financial contract in your name – from your cellphone contract to your home loan. 

    Also, if someone is considering employing you, they'll be able to see if you’re someone who has good personal financial management skills – particularly if the role you're being considered for requires you to work with money.

    So when it comes to poor debt management, your past can come back to haunt you in more ways than one.

    For more information, visit: www.transunion.co.za or www.experian.co.za

    EXTRA SOURCES: City Press

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