You know that feeling of bliss when your offer to purchase on your dream home has just been accepted? Or the rush of taking a test drive in that new car you have been admiring for months? But then, reality quickly takes hold when you need to go through the steps of getting approval for a bond or vehicle finance. Applying for credit should not be so daunting, especially if you know your credit facts.
At the end of the third quarter of 2018, South Africans had financed fixed property and motor vehicles to the value of more than R1.3 trillion*. From this, it is clear that access to credit is an important way for South Africans to enhance their living standards and reach those important life goals. Yet accessing these types of credit facilities is not always straight forward and requires financial discipline and know-how to get the best deal manageable within your financial position. When embarking on the journey of big ticket credit purchases, consumers should consider a number of factors such as their credit report and score as well as their affordability, assets and level of discretionary spend. This may sound complicated but it is all explained in more detail below.
As part of assessing your credit health, credit providers and lenders will examine your credit report because it reflects many of your financial behaviours and habits. In addition, they will look at your credit score which is derived from your credit report. Your credit score is a three-digit number that gives a credit provider an indication of your creditworthiness, and may inform their decision on granting you credit. It is made up of a number of factors, including how and when you pay your bills; how much debt you’re liable for, and how your credit behaviour stacks up against other borrowers.
Your credit score may also play a role in determining the interest rate you receive on a loan or the spending limit on your credit card or clothing account. This is especially relevant when negotiating the interest rate on big ticket credit items such as vehicle finance or a home loan, where a few percentage difference, can cost you thousands of Rands more every month. For example an additional 1% above the current prime lending rate for a R1.5 million home loan, taken over 20 years, will cost you approximately R1 000 extra each month or more than R240 000 over the lifetime of the loan.
When assessing a consumer for credit, credit providers will not only assess a consumer’s credit report and score, but will also look to understand their affordability. A good way to assess your affordability is to work out your debt-to-income ratio. In summary, these are your monthly debt commitments versus your income, such as your salary as well as other ongoing income streams.
To work out your debt-to-income ratio, add up all your monthly payment commitments e.g. school fees, rent, car repayments etc. Discretionary expenses like groceries and entertainment are not included in this calculation. Divide this by your net monthly salary to get your debt-to-income ratio.
Subscribers of TransUnion’s monthly and annual subscriptions, can make use of the Debt Analysis Tool available on the website, to quickly determine their debt-to-income ratio using data in their credit report. The result can then be compared against our ranges, being:
Another aspect credit providers will assess when making a big ticket lending decision, is your debt-to-asset ratio. You can work this out by dividing your total debt by your total assets. Simply put, it calculates how many of your assets you will have to sell to cover the costs of your debt. The right ratio is more complex to determine as it depends on a number of factors like the type of debt and life stage of the individual. However, if you have significantly more debt than assets, you may be considered a risk to creditors.
A recent TransUnion Consumer Credit Index report showed that the estimated national household bank debt as a percentage of our disposable income was 71%. That’s high and it reflects the challenging financial times we find ourselves in. As a result, when you apply for credit, banks will look to stress test your monthly budget to understand if you can take the knock of an unexpected expense such as a costly vehicle repair or a significant increase in the prime lending rate, while still being able to service your debts. This talks directly to your level of discretionary spend, or money you have available for non-essential items such holidays and entertainment. An adequate amount of discretionary spend will serve as a buffer to absorb any unplanned expenses.
By understanding all of these factors, not only can you make a more informed lending decision and be more confident in the outcome of your credit application, but it will also put in a stronger negotiating position, especially when it comes to interest rates and the cost of the credit.
We encourage every consumer to get more credit savvy by accessing their free annual credit report. Every consumer is entitled to one free credit report from each of the credit bureaus every year. You can get your TransUnion report by logging on to www.transunion.co.za or calling 0861 482 482.
*Consumer Credit Index Report Q4 2018 - https://www.transunion.co.za/lp/CCI