The management of your finances has a massive impact on whether you qualify for credit especially, when applying to a financial institution for a home loan.
The basic definition of ‘credit’: the practice of borrowing money with the commitment to pay off that debt within a stipulated timeframe.
Credit comes at a cost, where the party loaning the money charges interest for doing so. Defaulting on the promise to repay the debt, especially on a regular basis and within the agreed to timeframe, has consequences, not least of which is an individual’s credit score, a means by which statistics determine the likelihood or risk of the applicant being able to pay back money which he or she has been loaned. These stats are determined by a credit bureau, which is mandated by virtue of the National Credit Act (NCA), to retain information on the individuals’ credit history. The credit bureau makes this information accessible to loan institutions and individuals who have participated in credit activities.
One of South Africa’s major credit bureaus is TransUnion Africa, whose head of consumer is Kriben Reddy. He explains that the rise of credit bureaus over the past decades is largely in response to the need for financial stability and credit market efficiency. “Most importantly, credit bureaus support an economy’s financial inclusion by helping lenders and businesses reduce the risks associated with lending, enabling them to make better loan decisions. In effect, credit bureaus promote responsible lending.”
Another important reason credit bureaus exist is to help consumers monitor their credit status and take actions to improve their financial standing, and, if in good standing, are enabled to access credit faster and more efficiently. “We think about this aspect of the service as TransUnion being a reliable representative of consumers and a trust enabler. Ultimately this means that businesses and consumers that engage with our company can transact with confidence. We call this Information for Good,” says Reddy.
How your credit score is determined:
A credit score is a three-digit number that reflects an individual’s current and past credit payment behaviour. In the case of TransUnion, there are seven categories, rated as follows:
- Excellent - 767-999;
- Good - 681-766;
- Favourable 614-680;
- Average - 583-613;
- Below average - 527-582;
- Unfavourable - 487-526;
- Poor - 0-486.
Generally, the higher the score, the better because this often puts a home loan applicant in a favourable position to negotiate a better interest rate or more favourable terms. “However,” warns Reddy, “a credit score is not the only benchmark that such lenders use to assess qualification for credit. They also look at elements such as over-indebtedness and affordability, income and expenses, demographic information, current and past relationship with the lender, and levels of collateral.”
What happens if you are rated poorly?
The most common (informal) term used to describe a poor or unfavourable credit score is blacklisting. However, this word, or variations thereof, is not supported by credit bureaus. Reddy sets the record straight by explaining that it is not the credit bureau’s role to blacklist people. “We simply provide information on the credit behaviour to lenders and businesses, who will make their lending decisions accordingly.
“We prefer to refer to ‘adverse’ credit listings, which come about as a result of poor repayment history on products such as loans or credit cards, and which will be reflected in credit reports, as will any legal judgements. The credit score is lowered as a result of negative credit behaviour, making it far more difficult to gain access to new loans or credit facilities.”
Reddy also describes the three main terms that credit bureaus use and stresses the importance of understanding these terms and their impact:
- Defaults. A default occurs when a credit provider acts against you because you missed payments over a period of three to six months, depending on the terms of agreement. A default will remain on your credit report for a maximum of one year. Paid-up defaults are removed once confirmation of paid-up status is received from the credit provider. Once you settle the total outstanding amount, the report will show ‘fully paid consequent to listing’. After two years, this will no longer reflect on your report.
- Notices. Notices include administration orders, provisional and final sequestration, and rehabilitation orders. Once you become subject to any of these processes, you will have to be formally rehabilitated (meaning the act of restoring your credit reputation) before you can again enter into legal agreements unassisted. This will normally remain on your credit report for five years.
- Judgments. When you fall behind with your account payments and fail to respond to reminder letters, or if you don’t stick to your payment arrangement, the credit provider can issue a summons and obtain a judgment against you. Once you have a judgment listed in your credit report, any access to new credit will be denied outright. A judgment remains on your credit report for five years or until it is paid in full or rescinded by a court.
Checking your own credit status
Every individual is entitled to access their own credit report for free, but only once every 12 months. “Use this facility,” states Reddy, “for it will provide you with many insights. When accessing your report through TransUnion, we recommend you check it carefully for any inaccuracies, such as accounts that you don’t recognise or incorrect information about late payments. Disputing these inaccuracies and having them removed from your credit report is important if you wish to improve your credit health.”
Being able to keep tabs on any positive or negative changes to your credit score is also important for working out whether you can afford a home loan prior to application because you’ll be able to judge what amount of credit you can access.
Bear in mind that a person’s financial status can change very quickly, for life is not predictable. One seemingly small crisis can have far-reaching consequences. If you feel that you are approaching an unmanageable debt situation, reach out early to the lender and renegotiate payment terms to avoid a negative credit rating.
Writer : Kerry Dimmer
