During uncertain times, you may need to make financial decisions you haven’t planned for. Whether it’s something small like opening a clothing account, or something big, like moving into a new home, your credit score could affect the outcome of these decisions.
If your credit rating is poor, your application is likely to be turned down, or you may even be charged extra interest.
So, what exactly is a credit rating? Credit rating (also referred to as your credit score) is one of those financial terms which is often bandied about but is not always well understood.
Essentially, your credit rating is an estimate of your ability to repay money you’ve borrowed based on your previous payment history.
Credit bureaus calculate credit scores; they gather the information about your credit habits directly from your creditors as well as from public records, such as court judgments. The scales they use can differ between bureaus, but usually include a descriptor indicating a very high, high, medium, low or minimum risk.
Although we tend to use the terms ‘rating’ and ‘score’ somewhat interchangeably, historically, credit ratings applied to businesses and governments, while credit scores applied to individuals.
In recent years, this strict definition has relaxed. One of the reasons is that although South Africans were entitled by law to one free credit report each year from any of the credit bureaus, most people didn’t bother to do a credit score check. This could be because they were unaware, it was too complicated to request a report, or too difficult to understand.
As a result, some financial services companies launched products such as DirectAxis Pulse , which lets registered users check their credit score rating as often as they like for free. Pulse provides ratings such as poor, getting there, good, very good or excellent, rather than an actual credit score, making it easier for you to understand your rating.
It also offers additional information such as your monthly credit commitments and a breakdown of transactions that affect the score. You can also track your rating over time.
Whatever it’s called, the important thing to remember is that a high credit score or good credit score rating indicates that you have a good financial track record and are likely to pay your loan back within the agreed time. A low score suggests that you’ve had trouble making payments in the past and might have similar problems in the future.
Credit scores are important because they help credit providers decide whether they should lend someone money. Your score can also affect the interest rate charged on a loan. If you are considered higher risk, you may still be successful in your loan application – but you will pay more for that loan than someone who has a better credit score.
The good news is that there are some things you can do to improve your credit rating:
How to improve your credit rating
● Check your credit rating and profile on DirectAxis Pulse to make sure there are no mistakes reported. Ensure there are no late payments incorrectly listed and that the amount on each credit account is accurate.
● You should also check to see that there are no unfamiliar accounts or unpaid debts. If fraudsters get hold of your ID number or other personal information, they can use this to open accounts in your name. The trail of unpaid bills they leave then gets reflected in your credit score.
How to fix a bad credit rating
If there are no mistakes or illegal transactions, you can still improve your credit rating, but it will take more time.
● First consider whether you’re paying your debts on time. Even a payment that is only a few days late can affect your status.
● While keeping your creditors informed if you are having difficulties won’t improve your rating, negotiating a payment schedule is a positive step. Over time, as you settle the outstanding balances, this positively impact your credit status.
It’s important to remember that any overdue account will negatively affect your credit rating. Paying it off or closing it doesn’t make your payment history go away, and information about your payment history can stay on your record for two years and more.
Your credit rating is based on information found in your credit report, including your payment history, what is owed, activity, how long you’ve serviced an account, judgements and defaults, and enquiries about your creditworthiness.
Bear this in mind when thinking about your financial priorities. A poor decision made under stress during a difficult time today could have long-term implications on whether you can access credit and other financial services in the future. Knowing your credit rating is an important part of keeping tabs on your financial health.