What You Need to Know About Credit Assessments in South Africa

Credit assessment, credit score, credit check, credit report are all terms we hear in relation to loans, credit cards and lending but what does it actually mean and what is the difference between a good credit score versus a bad one and how does it impact you.

With South Africa’s unemployment rate on the rise and so many people struggling to make ends meet, it is becoming increasingly important for individuals to be aware of how their financial behaviour could impact their ability to qualify for loans or credit in future.

We explore the various methods of assessing credit, and what factors influence your credit rating.

What is a credit assessment?

A credit assessment, also known as a credit check, is used by banks, cell phone companies and other credit providers to determine your creditworthiness when you apply for credit. A credit provider will do a credit check when, for instance, you want to open a store account, take out a cell phone contract, apply for a car loan, home loan or a credit card. The credit check assesses your affordability to take on credit and evaluate the likelihood that you will make the required repayments.

Credit assessors typically look at the six factors to determine your repayment ability:

• Employment history
• Income
• Payment history
• Length of your credit history
• Current credit agreements
• Type and variety of credit you hold (credit mix)
• New credit – how often you apply for credit

The benefits of checking your credit report

A credit report is a comprehensive evaluation of your financial standing. Knowing your credit rating helps you understand what you need to do to improve your credit rating and better your chance of qualifying for a loan or other form of credit.

Armed with a credit report, you can plan for your future with more assurance. This is particularly important if you are planning to buy a car or a home. Being more aware of your total debt situation may also encourage you to pay off your debt faster and to pay your monthly debt repayments on time.

What is a credit score?

Your credit score is calculated by a credit bureau, or credit reporting agency, based on an assessment of all the available information on the status of your credit and your repayment behaviour.

The credit reporting agencies use a formula that evaluates whether you are a high or low-risk payer and assigns you with a rating typically represented by a 3-digit number.  The higher the number the better your credit rating and the lower the number the poorer your rating is.

Why do I have more than one credit score?

None of us have just one credit score. This is in part because there are four different credit reference agencies and each one of them might have slightly different information about you. Each lender puts a different value on the various aspects of your credit report, which also alters the score. This info is pasted from the ClearScore website.

A good credit score means you are more likely to be approved for loans such as a car or home loans and you will be offered better interest rates. A poor score means you are less likely to receive credit from lenders and if you do, the cost of debt will be higher because you will pay a higher interest rate.

How to apply for your credit rating report

As a South African, you are entitled to one free credit report per year from a credit bureau. If you require more than one credit score in a year you will be charged a small fee. Below is a list of the main credit reporting agencies below can provide you with a credit report:

• TransUnion
• Experian
• VeriCred Credit Bureau
• Xpert Decision System (XDS)
• Consumer Profile Bureau (CPB)

The difference between good and bad credit and how it impacts your credit rating?

It is important to distinguish between good debt and bad debt.

An easy way to understand the difference between good and bad debt is that good debt has the potential to increase your net worth or improve your financial standing by putting you in a better financial position at the end of the loan period than you were before. Examples would be taking a home loan to buy a property which is generally expected to increase in value. Another example is study debt because it allows you to gain skills that will allow you to increase your earnings capacity.

Bad debt is credit taken out to finance depreciating assets such as cars, or to pay for consumption goods such as clothing and food.

Multiple bad credit agreements/loans on your credit record indicates to a credit provider that you may be in financial trouble. But the number and type of credit agreements will play a role. A car loan every four years or so is okay but, if you take out personal loans on a regular basis it usually means you have overextended yourself and that you are living beyond your means.

How to improve your credit score

Now that you understand the difference between good credit and bad credit, it is important to understand how your financial behaviour impacts your credit rating.

Behaviours that have a negative impact on your credit score:

• Missing payments
• Paying your accounts late
• Defaulting on your loans
• Using too much credit
• Applying for a large amount of credit over a short period
• Regularly making use of ‘pay day’ loans
• Court judgements
• Bankruptcy or sequestration

Behaviours that can improve your credit score:

• Pay your bills on time each month
• Reduce the overall amount of debt you have
• Make outstanding payments as soon as possible
• Check your credit report regularly
• Dispute inaccurate information in your credit report
• Limit your credit requests
• Spend responsibly
• Take steps to deal with your debt if you are overindebted

How to build a credit score if you don’t have debt

Unfortunately, there is no way to build a credit rating or establish credit score without taking on some form of debt. The reason for this is because your credit score is calculated based on your spending habits and how you manage your money, debts and creditors.

It is important to note that no credit rating is not a bad credit rating, it just means that there is no, or insufficient, data available for a credit bureau to assign you with a rating. In other words, the lack of data makes it impossible to determine whether you are a good credit risk or not.

The bad news is that without a credit rating you are unable to apply for a home loan or other types of secured debts. The good news is there is a way to start building your credit score responsibly. The first step is to apply for financial products such as: 

• Credit card
• Motor finance
• Cell phone contract
• Store account/s

You need to be responsible when taking out any form of credit and you need to meet your repayment commitments on time and in full. If you miss payments or pay late, even by a few days, it will have a negative impact on your rating. Ultimately a bad credit score is worse than no credit score at all.

Ultimately lenders are looking to identify patterns of behaviour that highlight whether you are a good risk or bad risk, and it boils down to how responsible you are with your finances. Responsible financial behaviour means not taking out additional credit when you can’t afford to, not living on credit to finance an unnecessarily expensive lifestyle and not spending on non-essential costs. 

Do you need help getting your finances back on track?

Reach out to Cyber Finance today for your free debt assessment and one of our specialists will be in touch to help you build a better future credit score.