Many people don’t understand how their credit profile is assessed or how their financial behaviours impact their credit rating, according to Ans Gerber, head of Data Insights Experian Africa.
It is important that young people have an understanding of their credit rating and their credit profile because it can have a huge impact when they are looking to buy a car or house.
Here are 7 things young people need to know about credit ratings:
What is a credit rating?
Credit rating is an assessment of a person’s creditworthiness. That is how a lender determines whether you, as a borrower, will default on credit obligations or how worthy you are to receive new credit.
How is credit rating calculated?
In South Africa, credit rating is calculated by a credit bureau based on a person’s credit report. The credit bureau will look at a number of factors including how much a person earns, how much debt the person has as well as how a person’s credit report compares to other consumers that make use of credit.
What are the five credit rating categories?
According to TransUnion, there are seven credit score categories.
| Credit score | Credit rating |
| 767 – 999 | Excellent |
| 681 – 766 | Good |
| 614 – 680 | Favourable |
| 583 - 613 | Average |
| 527 – 582 | Below average |
| 487 – 526 | Unfavourable |
| 0 - 486 | Poor |
What can lead to a poor credit rating?
Being aware of the factors that can result in a poor credit rating is important to ensure that consumers can avoid those mistakes.
Here are five factors that can lead to a poor credit rating:
- Late payments
- Not paying bills
- Loan default
- Being handed to debt collectors
- Filing for bankruptcy
John Manyike, Old Mutual’s head of Financial Education, says a simple misunderstanding can lead to negative reports appearing on your record.
“If a bill must be paid on the last day of the month, you may think that by sending in your payment on this date that you are a good payer. The problem is that the transaction may only be completed the following day or later. Your credit record will show that the payment was late,” Manyike warns.
How long will a bad credit rating be on my record?
According to Manyike, once the bad rating is on your credit record, the comments are in place for several years and can affect you when you apply for a loan or credit.
How often should I check my credit rating?
Check your credit rating at least once a year.
“You will not be able to have any comments deleted but may find that there have been some mistakes that you can have rectified,” says Manyike.
How can I keep my credit rating up and record clean?
If you are worried about maintaining a good credit rating and credit report then there are steps you can take to ensure that you never end up in the read.
1. Don’t apply for credit too often.
If you are applying for credit or loans frequently, it is an indication that you have financial challenges and the more often you apply for credit over 12 months, the more your name is listed.
2. Manage your credit card.
If the balance on your credit card is kept well below your borrowing limit (preferably 35%), your score will benefit.
3. Avoiding high balances on credit accounts.
Having a high balance on revolving credit accounts can lead to a high credit use rate that can hurt your score. Keep a low balance in relation to the available credit ratings to maintain that good credit score.
4. Pay up on overdue accounts.
While a late payment can remain on a person’s credit report for years, getting all the accounts paid up to date can help benefit a person’s credit score.
According to Manyike, even when things do go wrong a clear credit rating is not unreachable.
“Pay your dues, clear your name, and you can then apply for a clearance certificate. It can be a lengthy process to clear your name but your financial future will benefit from it.”
IOL Wealth