Understanding the purpose of your credit score

 Article by Michael-Anne Abrahams, MyProperty Home Loans Expert

As living costs continue to rise, applying for a home loan - or any other finance, can seem like a daunting endeavour. However, understanding how the credit process works, what the deciding factors are when applying for credit, and at which interest rate it is offered, is vital to your financial fitness.

You might have heard the terms credit score and credit profile before, but knowing what they truly mean is important as financial institutes use these as deciding factors when you apply for any line of credit.

Your credit score assesses the likelihood of defaulting

Knowing that financial institutions can only continue their existence by ensuring they extend credit to borrowers that can pay back their debt, is key to understanding why your credit score and profile are so important.

Some consumers consistently make their monthly repayments, while others can be slow to and still others do not and effectively default. This means they do not pay back the money they borrowed. Financial institutes are highly motivated to separate debt that will be paid back from debt that may be paid back.

So how do they determine who are good prospects and the risky ones?

By counting on and utilising credit vetting systems that use the applicants' repayment history behaviours and other various proprietary factors to predict the likelihood of future repayment.

The two major agencies, known as credit bureaus, in South Africa, are TransUnion and Experian. Other players in the South African market are XDS, CPB, and VeriCred.

There are approximately 23 million active credit users in South Africa and every single one of them at some point opened some kind of credit account, such as a cell phone, credit card, or personal loan, will have a credit score. People under the age of 18, in South Africa, cannot apply for credit in their capacity and therefore will not have a score. There are however many people that opt not to have credit later in their life and therefore have no accounts for credit bureaus to assess.

A credit score is a summary of how well a consumer repays their debt over time. The credit scoring system assigns a number to your profile based on repayment behaviour. The various bureaus have their propriety numbering system, so for this article, we will use 0 to 900.

A poor score would be a number ranging from 0 to 680, a fair score would range between 681 and 750 and a good score would be anything higher than 751.

The two most important things that factor into your score are how consistently debt is repaid and the outstanding balance on the current debt. Then things such as a mix of accounts (loans/credit card/cellphones etc), the age of the accounts (how long they have been active), and any newly opened accounts.

Your score will assist creditors in deciding whether to grant you credit, as well as the interest rate they will offer you. This also affects a bank's decision when applying for assets finance such as a home or car.

Things you can do to improve your credit score

The most important thing to do is to pay your accounts on time.

The second most important thing is to check your report regularly to ensure that your credit report reflects your payment history accurately.

If you pay your accounts every three months, your account may be ‘up to date’ however, reflects a delinquency status four times a year, meaning that accounts are only being paid after 90 days, lowering your score and sending alarm bells to creditors that you are a ‘risk’ client.

So paying your accounts on time every month, not only allows you to avoid defaulting but also increases your overall score.

Lastly, the catch-22, having more credit accounts can positively affect your score. Why? Because this shows other creditors that you are creditworthy, and maintaining low credit exposure shows that you are responsible and trustworthy. Keep in mind that this doesn't mean that you should use credit to overspend and create unnecessary debt.

How we can help

Before you start applying for home loans, let the MyProperty Home Loan experts help you do a pre-qualification to not only assess the type of home loan you might be able to get but to help you identify any issues that could negatively affect your ability to successfully obtain a home loan.