MONEY: The ins and outs of personal credithttp://finweek.com/2014/10/30/money-ins-outs-personal-credit/

October 30, 2014 by Finweek Staff Leave a Comment

Many of us have grown up with the belief that buying anything on credit is the first step to a future

filled with debt and so must be avoided at all costs.

Most people would love to own a house, or a car or two one day. Unfortunately, very few of us have

the money on-hand to purchase these without the help of finance from a financial institution. Used

wisely and responsibly, credit can work to your advantage - if you are dedicated to paying your

accounts on time.

Theunis Kruger, head of Unsecured Lending at Standard Bank says, “A loan from a bank is approved

or declined based on your record of spending, borrowing and paying back. This information is housed

by credit bureaus. Virtually every organisation that lends you money, or has a financial arrangement

with you, will check your credit history before they extend the loan or service.”

In addition to different credit reports, credit bureaus also produce a credit score. If you pay your bills

on time, you will have a good credit score and it should be easier for you to secure a loan. However, if

you miss payments, or pay your bills late, your score will be negatively affected and the bank will be

more reluctant to lend you the money you need. Understanding your credit score is a convenient way

of tracking your credit health and whether it is improving.”

All financial service providers subscribe to one or more credit bureaus to obtain information of

prospective clients and inform them regarding their existing clients’ credit behaviour. To get a picture

of your credit rating you have to get reports from one of these credit bureaus. Fortunately, you are

entitled to a free report every year. They will also provide you with more detailed credit history

including your credit score for a small fee. It is important to note that your credit report is confidential;

only you and registered financial institutions, retailers and companies that subscribe to the service can

view your information.

When viewing your credit history, it is important to make sure all your information is correct and up to

date, Kruger advises: “Look at it closely to make sure it is accurate”.

The credit history is comprised of the following four sections: Identifying information - This section has your date of birth, your current and previous

addresses, telephone numbers, your employer’s and your spouse's name.

Public records - Has information of an event such as an insolvency, creditor judgments and

defaults. Most people are fully aware of issues in this area and every effort must be made to

rectify any outstanding debts. This information should be removed from your record after you

settle outstanding bills.

Payment profile information - Contains your immediate credit history with the individual

accounts or credit lines; for example, the date/period you opened the account, of credit, etc.

Enquiries - A list of everyone who has enquired about your credit status.

The banks use scoring models to develop a credit profile of a potential borrower. This typically takes

into account your current income, employment history and credit bureau results - all this provides a

picture of your debt and payment history with all major financial service providers. It also evaluates

your credit performance with the bank itself, if you are an existing client.

“If you get turned down for a loan you need to find out why, so you can put a plan in place to restore

your profile and improve your credit score,” says Kruger. “A declined application could simply be

about affordability. While you may feel disappointed that you have been turned down, it may be for the

best as being over-burdened with debt is a very unpleasant situation to be in. You should never take

out more credit than you need. Should you later want to borrow for the big ticket items like a home or

a car or you have an unexpected life event, you will have enough room in your budget to afford the

loan repayments.”