When you apply for credit for a car, property or even a cellphone contract, creditors want to know whether you are financially reliable and can pay it back. This is where a credit report with your credit score comes in.
"A poor credit score will negatively affect your ability to obtain credit," says debt counsellor Stephen Mulima.
What is a credit report?
A credit report is a compilation of information about how you handle debt or, according to consumer-reporting agency TransUnion, a snapshot of your financial history.
Creditors use it as a primary tool in deciding whether or not to give you credit. Included in the report is your history of payments to creditors and public records, such as judgments or bankruptcies, which are items that may affect your creditworthiness.
"A person will want to get something as simple as a phone on contract, and then find out that they can't because their credit score is poor," Mulima told HuffPost SA.
A credit score is the summary of your credit report in the form of a number. The number indicates how good or bad your credit history is. The higher the score, the better -- although this depends on how it's weighted.
How do I get one or know my score?
By law, as a South African citizen, you are entitled to one free credit report every year. Yet less than 3 percent of South Africans check their scores annually.
Your score may differ at all these institutions as they calculate it differently.
A person will want to get something as simple as a phone on contract and find out that they can't because their credit score is bad.
I honour all my credit payments, so I'm fine, right?
There are other recommended advantages for checking your credit report.
Examining it will help you see if any accounts have been opened in your name without your consent or if any accounts you closed reflect as open or vice versa.
"You may find that you still owe money on [an old] clothing account and the amount has been growing because of interest. You thought you'd finished paying it off a long time ago, but the last R20 just grew and grew. Now it reflects badly on your name," says Mulima.
You have a right to query any inaccuracies you might find.
Mulima's top tips to maintain a good credit score:
- Pay all your monthly instalments and pay them on time.
- If you purchase something on credit, make sure it's within your budget. A good rule is to try to keep your credit repayments below 30 percent of your salary. "Don't over-indebt yourself," says Mulima.
- Make arrangements with your credit provider if you are unable to make a payment, but don't ignore your obligation completely. "Late and missed payments reflect on your credit report," he says.
Although a number of credit-active South Africans are reportedly over-indebted, Mulima says this can be overcome -- and it starts with being honest about how much you can afford to spend on anything. "If you're confused, consult a debt counsellor to explore your options."