Credit rating or credit score is one of those financial terms which is often bandied about, but not necessarily understood, so what is it and why is it important?
At its most basic level a credit rating is an estimate of a person or organisation’s ability to repay money they have borrowed based on their 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 judgements. The scales they use can differ between bureaus, but usually include a descriptor indicating if you are very high, high, medium, low or minimum risk.
Although the terms are often used interchangeably strictly speaking credit ratings apply to businesses and governments, while credit scores apply to individuals.
A high credit score indicates that the person wanting to borrow money has a good track record and will pay it back within the agreed time. A low score suggests that the borrower has had trouble with making payments in the past and might have similar problems in future.
The reason credit scores are important is that these help credit providers to decide whether they should lend someone money. Your score can also affect the interest rate charged on a loan.
A person with a low credit score will be considered high risk and as a result may not be given a loan as their score indicates that they may not be able to afford to pay the loan back.
By law South African consumers are entitled to one free credit report a year. Most credit bureaus offer a service that allows you to receive more regular reports for a small fee.