Your credit record, or profile, compiled by credit bureaus from information shared with them by lenders, retailers and insurance companies on how you handle your finances, is more important than you might realise. Lenders use it to assess your credit risk, and price that risk into your finance charges when you apply for a loan. But your profile is also accessible to insurers and even potential employers who need a picture of your financial behaviour.
You are entitled to a free credit report annually from each of the bureaus, which includes a summary of your profile and an overall credit score determined by the bureau. This score rates you, among other things, on how diligent you are at repaying your debts and the extent to which you rely on debt to cover your expenses. The higher your score, the more comfortable the lender will be that the credit applied for will not overburden you and that you will honour the credit agreement and make your payments on time. With this information, the lender can offer you a lower interest rate than someone who presents a greater risk.
But what if your score is low or has dropped recently – if you have missed payments, or worse, received a judgment against you for defaulting on a debt? How easy is it to redeem yourself in the eyes of credit providers and improve your score?
Fatgie Adams, director of credit risk solutions at TransUnion Africa, one of South Africa’s major credit bureaus, says that although adverse information must remain on your credit profile for a specified period, as required by the National Credit Act, your profile is continually being updated with new information, with the result that any improvement in your behaviour will reflect in your score.
“Because you have a judgment, or a default on your name, it’s not the end of the world,” Adams says. “There’s always a way to recover from that. Even where there have been late payments, missed payments, or high utilisation, a change in behaviour can improve your profile, and you’ll start seeing your credit score rising,” he says.
Importantly, you can only improve your position once you know your position, and for that you need to see your credit report. Another good reason for accessing your report is to check that your identity has not been compromised and fraudsters are not accessing credit in your name.
“You get one free report a year, and this allows you to actually look at your profile to understand what credit is in your name and whether you are aware of it, because there are many bad actors in the market who perform fraudulent acts, and potentially take out credit in your name without you knowing. And this could be the reason you end up in a position of default or judgment.
“So reviewing your credit report regularly allows you to check that there are no fraudulent accounts, or accounts you weren’t aware of, but also gives you an understanding of your financial standing at a specific point in time. It is important, especially if you have plans of perhaps buying a house or a car, to understand what your standing is in terms of your credit score and what you can do to improve your score. That will enable you to finance that car, for example, on better terms,” Adams says.
Your credit score is your passport to better financial access and products, he says. “It’s also good for other things, like applying for jobs – they look at your credit score. In fact, it’s used across many industries, so it’s important to understand your score, what makes up that score, and how you can improve it,” Adams says.
