Ignorance might be bliss, but when it comes to your financial affairs, being unaware of your credit score can give you grief, warns Georgina Crouth.
Much like traffic fines, e-toll accounts and the calorie count of the snack you might have before bedtime, many people blinker themselves to their credit worthiness, seeming to believe if you don’t ask about it, it doesn’t exist.
But not knowing about your credit worthiness can hurt you in a real way. Imagine you’re the victim of identity fraud and someone’s living it up with loans taken in your name? The first you hear of it is when the letters of demand arrive and you suddenly owe money to the world? Or, when you need to apply for credit - a loan, studies, a new vehicle or renovations to your home - and you discover you don’t qualify?
Debt is a fact of life: it might be unpleasant, but for many of us, it’s unavoidable, even with fraud out of the equation. Disaster strikes and even with a savings cushion, you’re not prepared for it. Take medical debt. You fall seriously ill and need to find money somewhere to pay for treatment. Or your medical aid only covers a certain amount of hospitalisation and the gazillions still owed are for your account.
So you approach a financial institution, only to find out you don’t qualify for a loan.
It shouldn’t come as much of a surprise though, because once a year, you’re entitled to a free credit report from one of the country’s four credit bureaus yet few people embark on the exercise. Of South Africa’s 23 million credit-active consumers, only about 100 000 people actually check their credit reports a year.
There’s confusion around these reports, the deputy credit ombudsman Reana Steyn tells me, because bureaus punt “scores” but your credit history is far more important and South Africans’ understanding of a “credit score” is more loosely defined than elsewhere.
Credit scores are basically summaries of your credit report, expressed numerically. Each bureau uses its formula to determine how the way you conduct your finances compares to other consumers.
“In the US, everyone knows their credit scores, much like they’d know their blood type. It’s a number and a status thing - you know what your score is and you can log on to websites, where you can see if you qualify for say a particular car, a home etc. People speak about it quite freely - unless, of course, their score is low.”
Here, the opposite holds true. A credit score is not an objective assessment: the bureaus might be able to provide you with a score when you request a credit report, but payment history and credit profiles trump everything.
Two cases that recently came to the credit ombud’s attention highlight the impact your payment history can have on your profile.
In one, a complainant wanted to buy a new car but was declined. He thought his history was flawless. In March last year, he paid off his only two accounts with clothing retailers, and he didn’t owe money to any other creditors. One bureau gave him an excellent score because his accounts were paid up and they weren’t huge credit agreements.
Then another bureau told him he was high-risk: his accounts had gone into arrears before he paid them up. He has since not taken out any credit.
“The client was very unhappy - he was insisting that because the one bureau gave him an excellent score, the other one should be ordered to fix their report, but it doesn’t work like that,” Steyn said.
“Credit providers don’t know how they (clients with no credit) are going to conduct their accounts. A good risk client is someone who has accounts, and has been paying them regularly, for years. The (bureaus) don’t say to the creditors: don’t give them credit, that’s just their score.”
In the second case, a complainant who applied for credit was told she was high-risk, despite having cleaned her debt slate almost a year before. This after having had numerous loans, which fell into arrears for about nine months.
“Her security provider and short-term insurance were paid regularly; other accounts fell badly into arrears, then paid and closed. She took many micro loans, fell into arrears for nine months and then managed to pay them off. She had two accounts, but no credit. She hadn’t been able to build up a positive credit history since paying off her debt. She needs a good credit history by taking on credit and paying it on time, every month.”
Salem Dyafta, consumer brand manager at TransUnion, America’s third largest credit bureau which operates in 33 countries, agrees the risk you pose to credit providers is one of the biggest factors.
“Due to the credit providers not (being) able to assess your risk, you may be given credit at less favourable conditions such as a higher interest rate. All debt is dependent on how you repay it. Some debt is viewed bad, such as microloans, as it might reflect a desperate situation, especially if you have quite a few of them, but it all depends on how you pay.
“For your score’, (having loans) might not affect you negatively... if you meet the obligations. However, if we look at affordability, if - for example - you are maxing your credit limit every month, it might affect your score.”
Credit bureaus “score” individuals based on their payment history; their indebtedness; negative information; length of credit history; and account application and enquiry activity - if you tried to shop around for loans or open a number of accounts over a short period of time, it’s never a good reflection.
There’s no quick-fix because once you’ve paid off your debt, it takes another three to six months for your profile to begin looking better. But while creditors can look back five years, they attach more weight to the most recent 24 months.
TransUnion’s website says when lenders review applicants, they look at four elements of a credit report: “Identification, account history, public records and enquiries. If a credit history has not been established, an applicant may need to have someone co-sign or be added as an authorised user on an account. A good option for those just starting to build credit when they don’t have a co-signer is a secured credit card, which requires users to put up cash as collateral. Once a credit history is established, it is important to maintain a good record. Credit history will be evaluated periodically and, provided they are in good standing, their credit score will increase.”
Why the different scorings? Steyn says the four bureaus use their own assessments, based on different information and weighing, selling products such as reports, scores and alerts to consumers.
“Credit reports are products that have been developed. All the credit agencies develop their own reports, say for high-end vehicles or microloans. They build in length of service, credit history, age, where you live etc into these bureau score cards. Every organisation also has its own assessment mechanism, which is automated. They use it to assess whether or not to give credit to people. Most of the organisations want a risk assessment: can they pay their debts, can they afford it. The bureaus sell score cards to consumers - banks and other creditors might ask for a credit report but they use their own mechanisms to determine risk.
“The bureaus’ reports are educational, they’re not determining risk. People compare reports from other bureaus and then say - why am I high risk here but not there?”
TransUnion notes that checking a credit report will not hurt your “score”.
“If consumers access their own credit reports, it does not have any effect on their credit scores. Reviewing a credit report results in what is called a soft pull’, or soft enquiry', meaning it will only be seen on a personal credit report. When a consumer applies for credit, the lender will review the applicant’s credit report, and a 'hard enquiry' will be added. Hard enquiries are shown to other lenders because they may represent new debt that doesn’t yet show on a credit report as an account. Hard enquiries can affect credit scores. Everyone should check their reports at least annually. It’s part of good credit management.”
You need debt to take on more credit because companies want to know who they are doing business with. How do you manage your accounts? What’s your history? Can you be trusted?
Taking advantage of that free credit assessment is a good place to start because it’s a reflection of your exposure on the market. Working on your payment profile and ridding it of unwanted debt is ultimately what matters.
Wise up. Here’s how!
Just a number: Don't worry about how you are “scored” - build your payment profile and your monthly payment pattern. When a credit provider is asked to assess whether or not to give you finance, they are most concerned about the potential risk you pose as a client.
Red flags: Outstanding balances, late or skipped payments, monthly instalments and affordability: these are warning lights to any business. Credit providers look at what type of accounts you have (micro loans generally don't look good, especially if it appears you have become dependent on them), how you conduct your payments, amounts outstanding, whether you've skipped payments and affordability.
Don't be late: TransUnion’s Salem Dyafta says it's important to pay all your credit obligations “on time, every month and to pay the full amount. It does not matter whether it is on the seventh or the first of the month - what is important is that you pay at the date you and the credit provider agreed on... If you pay late, the information will be recorded in your credit report. Your payment behaviour is important for your credit score and how you conduct these payments definitely affects your score”.
Debt be gone: Prescribed debt - after three years, if you haven't acknowledged or made a payment to a debt, it has prescribed and creditors are not allowed to submit details of this “debt” to the bureaus. If it's not, you need to raise the issue with the creditor, the bureau or the ombud.
* Georgina Crouth is a consumer watchdog with serious bite. Write to her at [email protected]. Check out more helpful consumer tips and advice at [email protected]
** Follow Georgie on Twitter: @askgeorgie
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