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Understanding Your Credit Score

23 Aug 2011

As at December 2010, credit bureaus held records of more than 39 million individuals, of which 18.5 million of these were credit –active. That's a lot of records! These records are used extensively by financial institutions to make credit decisions; essentially on home loan applications after you have successfully negotiated the deed of sale.

What do these reports contain?

Typically, these reports contain personal information such as:

Full names, addresses as well as contact telephone numbers
Employer information and history
A record of previous enquiries
A detailed account of all credit which the individual has available
A twenty four month account of the individual's payment activity on all open credit facilities
A record of any adverse listings – judgments, defaults, trace alerts
A fraud rating
A credit score
Why review these records........?

In the words of Dr Phil, "..past behavior is a near-perfect predictor of future behavior." By evaluating an individual's payment profile (his payment record to date), a very accurate conclusion can be drawn as to how the individual will manage his commitments in the future. This is of paramount importance for a financial institution to perform when assessing a new application. It protects the institution from bad debts, protects the individual from over-exposure, as well as ensures compliance with the National Credit Act. The manner in which an individual manages their payment profile impacts heavily on what has commonly come to be known as their "credit score"..

The Credit Score

In the same way that an estate agent would assess a property - with its positives and negatives - in order to arrive at an overall market value, so the principles of the credit score can be explained. The credit score is an overall score afforded to each individual. There are naturally instances where, although there is record of the individual, there is insufficient activity on that record to formulate a score. This would be similar to trying to determine the market value of a property when builders have just started digging the foundations. Where there is insufficient credit activity, the result is that a credit score cannot be formulated. This leads to an application for finance from such an individual not being considered. This does not suggest that one should be credit dependant, but simply that one needs to have been sufficiently credit active for a credit score to have been built up. This can be done very responsibly by having one or two retail accounts, which are conducted very well.

The credit score is a very reliable tool used by credit analysts to pre-determine the likelihood of future non- performance on a loan. It takes a number of aspects into account and correlates these into a predictable model. Among others, it factors in the following – these all then affect the score either positively or negatively:

Age and demographic information
The duration which accounts appearing on the profile have been established, and been active
The ratio of outstanding balances to credit limit
The number of recent enquiries
Delinquency of accounts
Adverse listings and arrears status

Keeping it healthy

To keep one's score intact, the following is important:

Limit enquiries
Always pay the required amount at the correct time on accounts
Stay as far away as possible from the maximum limit of the facility
Ensure that applications are completed accurately to prevent information errors

In conclusion, it is clear from the above that having a healthy credit score is vital if an individual intends accessing finance at any point in time. With proper financial planning, an astute financial approach, and the precise fulfillment of one's financial commitments, a perfectly acceptable credit score should result – and with it the ability to apply confidently for home loan financing.

Good luck and happy selling!!