For many people, accessing, reviewing and understanding their credit report and score is a daunting task. Consumers should learn the ins and outs of credit reports and scores, and how to use them to improve their financial health. Why should credit providers know more about your own credit history and patterns, when it is so easily accessible to you?
When you apply for credit, be it for a home loan, vehicle finance or a personal loan, your credit profile listed with the credit bureaus, is a significant factor in the approval process. A credit report and score, gives a good indication of the credit behaviour of a consumer and is something every credit provider is by law required to reference, in order to avoid over indebtedness as well as to understand the risk they would be taking in granting credit. In 2016 alone, credit providers requested 1.7 billion credit profiles from the credit bureaus, highlighting the value and importance placed on a consumer’s credit profile, and why consumers should take them more seriously.
While a credit report may seem to be quite detailed at first, it can be simplified by breaking it up into its four main components: personal information, payment profile, credit listings and enquiries. In addition to understanding the information contained in each of these sections, understanding the relevant regulations, your rights as a consumer, as well as how credit providers view and interpret this information, can go a long way to helping you maximise the value gained from your credit report and score.
Here’s some advice to help and motivate you to overcome your fear of looking into the details of your credit profile.
What is in your credit report?
Personal information - This section includes personal identification information, such as name, marital status, address, employment information and contact numbers. This information is compiled from applications you have previously made, including the last time you applied for credit. If your credit providers have outdated information, this may affect the details on your credit report.
Companies often use this information for consumer identification and verification, so it is vital that you keep all your information up to date. Not only does this ensure that credit providers have accurate insight, but may also alert you to any form of suspicious activity or identity theft.
Payment profile - The payment profile section (also known as total account history) looks at your payment behaviour over the past 24 months (per account), with up to five years of data kept on record. Most importantly, this section shows whether or not timely payment was made on each account, along with the date an account was opened, credit limit, payment terms and outstanding balance. All credit related accounts from credit providers and financial institutions such as home loans, vehicle finance and store accounts are contained here, even those taken with a 30 day payment arrangement.
It is also important to note that while late payments or non-payment, will negatively impact your credit score, long running accounts that are consistently paid on time will have a positive impact on your credit score.
In addition credit providers will look at two other factors evident in your payment profile. First they will assess the extent to which the available credit across the accounts has been utilized, where high utilization is viewed negatively. The other aspect they will assess, is the ratio of secured to unsecured credit, where an excess especially in unsecured lending will raise red flags.
Credit listings – In general, items listed in this section will negatively impact your credit score with the exception of notarial bonds. If you have failed to repay any debt within the terms of your agreement, you may have a ‘negative listing’ such as a default, judgement or administration order on your profile. This signals to credit providers that you failed to meet the terms of one or more of your credit obligations. These types of listings will have the greatest impact on your credit score and credit application assessments.
Defaults - When you default on your credit repayments the credit provider will load a default notice on your credit report. There are two types of defaults: an enforcement default where enforcement action is taken such as bad debt written off or handed over, credit card revoked or repossession of goods takes place; and subjective default which entails the classifications of consumer behaviour resulting from delinquency, slow payments, absconding or not being contactable.
Judgments – If you fall behind with your account payments and fail to respond to correspondence from the credit provider, then they may apply for a court judgement. A judgement is granted when a court gives the consumer an instruction to pay the outstanding account. A judgment remains on your credit record for 5 years or until it is paid in full or a rescission is granted by the courts.
Notices – When a consumer is consider insolvent or unable to pay their debts, a credit provider may apply to the court for a notice order against the consumer. Three types of notices exist being, sequestration rehabilitation and administration. Administration orders involve the appointment of an administrator to whom the consumer needs to make regular payments against their debt. Notices remain on your credit report for 5 years or until a notice of rehabilitation is granted. After 10 years a notice of sequestration is automatically rehabilitated.
Notarial Bonds – This is a special type of security taken in relation to moveable property. It simply gives the credit provider preference if the individual is sequestrated (legal possession of assets).
Trace Alerts - This is recorded when a credit or service provider is unable to successfully contact you. A credit provider places a trace alert so that if any other credit provider makes an enquiry, they are informed (via an alert) of the new contact information. The alert stays on a credit report for 12 months.
Enquiries – The enquiries section of your report includes records of every time your credit profile is accessed. Generally speaking two types of enquiries exist, being hard and soft enquiries. Soft enquiries occur when for example you check your own credit report, or an employer checks your credit status as part of their recruitment process. A soft enquiry will not affect your credit score.
Hard enquiries occur when a potential credit provider examines your credit report and uses that information to decide whether to extend an offer for credit. For instance, if a consumer applies for a home loan or vehicle finance, your credit provider will make a hard enquiry to help determine if you qualify for the loan. Hard enquiries will only begin to negatively impact your credit score if you make many credit applications in a short space of time, as this is a leading indicator that a consumer’s financial status may have changed recently.
Finally, the enquiries section should be studied carefully to ensure no enquiries were fraudulent. This is the first place potential identity theft would show up on your credit report.
What is the role of the credit bureau?
Many consumers do not fully understand the role a credit bureau plays, and many incorrectly understand them to be the companies that “blacklist” consumers. The reality is that credit bureaus are aggregators of credit information gathered from credit providers, the courts, utilities and other sources of data. Credit bureaus list both positive and negative information concerning a consumer. Most importantly it is the credit provider and not the bureaus who make assessments on a consumer’s application for credit, as well as the decision to approve or decline an application. It is important to also note that each credit provider has their own assessment criteria and in addition to a consumer’s credit report and score, they will assess other factors such as affordability before making a decision.
How can you access your credit profile?
Now that you are better equipped, the next step to better financial health, is to access your credit report and score. It is important to remember that you are entitled to one free credit report every 12 months. We also have a USSD channel through which you can purchase your score and is available by dialling *120*8801#.