What is a credit score, and why should I care?

AKA the “will anyone ever lend me money score”

What is a credit score, and why should I care?

Many of us have heard the term “credit score” or even “credit bureau”, but most of us don’t really know if they’re a thing in our lives.

People hear about nefarious credit scores (ohhh the shame), and wonder if this is something they should be working on, like their golf handicap or Discovery Vitality score.

In this article, we intend to clear that up for you in about four minutes

The short answer

Like all things finance, it depends on what you’re up to in your financial life.

Unfortunately this is not one of those articles you can just get a yes/no answer from in 2 seconds.

The medium answer

Imagine you want to buy a car and organize finance. Before the bank will lend you money, they would perform a credit check on you. They contact one of the credit bureaus, of which there are many, and request your report.

A credit bureau is simply a business (they’re in it to make money) that issues credit reports to people (mostly banks) who want to lend money to people like you. These people in turn, pay for the credit reports.

They collate financial data on all of us that then allows them to form a general view on someone’s ability to meet their financial obligations and bundles it in a report that is known in financial terminology as fancy schmancy.

It is certainly not a report card on your personal financial well-being, or how well you’re doing at life, rather it records every time you pay on your debit orders (or don’t) as well as how many various debts you owe.

The report would list all your current loans, including home loans, store accounts, and vehicle finance contracts. It would list various payments made on time, and those not. It might also list any judgments issued against you for non-payment of debt, as well as cellphone contracts and regular debit order contracts opened in your name.

To make things a little easier for the person reading the report, the credit bureau would give you a score. The score is a number that gives a general impression as to your credit-worthiness. Someone with a higher credit score should in theory be a lower risk client to lend money to.

Credit scores carry no bragging rights

As your credit score is a reflection of your ability to service your debt, it can be that if you have little to no debt, that your score could be very low. For someone who is very wealthy and is in the position to not have to finance things like car and house purchases with credit, their credit score might be a lot lower than someone who battles to make ends meet, servicing car, house, store account, and unsecured loan repayments every month.

Which is precisely why it is very important to understand that credit scores should mean nothing to you. They were designed by the bureaus to service their customers, being the lenders (banks). For banks, it’s an efficient way to know just what kind of person you are, when it comes to lending you money.

The editors would personally rather have a low credit score if it meant carrying no debt, than a high score and be heavily indebted.

The golden rule: He who has the gold, makes the rules

Credit scores, like debt in general, can work for you when you need them to.

In the absence of information, it can be very difficult for a bank to lend to you.

If a stranger walked up to you off the streets and wanted to borrow money, you’d most likely send them packing. If the financial director of a JSE listed company asked to borrow money, you’d find far fewer reasons to turn them away.

Good information about a borrower means a bank can quickly assess the risk of lending to someone and make informed decisions based on the borrower’s risk profile.

Who are these people?

There are many credit bureaus in SA, but the biggest ones are TransUnion (ITC), Experian, XDS, and Compuscan. By law, each South African is eligible to receive one free copy of their credit report per year. You can access yours by heading over to their websites.

Credit bureaus are very much entrenched into our personal finance lives. Their existence and how they operate is governed to some extent by the National Credit Act (NCA) and absent any other way in which banks can get a good feeling as to your ability to pay them back every month, credit bureaus are likely to be around for a long time.

The credit report road test

In the spirit of leading from the front, this Editor went ahead and got his free credit report from TransUnion. After some verification to prove I was who I said I was, it was all pretty effortless.

I was glad to see that there are no judgments against my name, or ominous remarks about my patronage, but there were some obvious errors.

I’ve apparently spent some time living in Johannesburg, working for the local municipality. They didn’t show my current address after having already lived there for 12 months now, but they did accurately list all my cellphone, DSTV, and regular monthly contracts.

But no credit score.

Here’s the catch

To get your actual score, you needed to pay R80. The NCA doesn’t say that you’re entitled to know your credit score, simply that you’re entitled to your credit report. The score itself is the product of TransUnion’s proprietary scoring system, which is why unless you’re comparing many different people, all with a TransUnion credit score, the number itself is worthless.

There is that underlying urge though to pay the strategically priced R80, that’s neither too significant for my wallet, nor too immaterial for TransUnion, simply to see what some people I’ve never met before think of my ability to service debt, in the form a nice shiny score.

Since I’m not in the market for credit at this time, I’ll pass for now.

If you’ve got a little time on your hands, it’d be worth picking your credit bureau of choice and getting your report. If there are inaccuracies or if someone has been committing fraud with the use of your ID number, it would be good to put an end to that.

The bureaus are obliged to correct any errors you put to them. Here are the addresses of the ‘Big 4’ bureaus.

Let us know what you find!

A thank you to the National Credit Ombud who assisted us with some of our research for this article. They’re the guys you speak to when the thought of having previously worked for the Johannesburg municipality is too much to leave uncorrected and the Bureau won’t put the matter right.

 

The Editors

People who Rock

Take Charge of Your Money TaxTim