The power of two – On credit scores and being twins

Imagine identical twins, Paul and Peter, growing up together, studying at university together, graduating and marrying within a year of each other. In every respect, they are typical identical twins.

Your credit rating makes you an individual

Paul and Peter each apply for an R 2 million home loan, and a motor vehicle loan valued at R450 000. This is where each has a different experience.

The bank grants Paul a loan at prime. His brother Peter gets charged prime plus two. On the surface, the difference seems a mere one per cent.

However, that translates to a cost difference close to R250 000 on these two transactions.

Why, if they are of the same age and an identical background, should it cost one brother more than the other?

Their credit score explains the difference. Whether you are applying for a loan, your creditworthiness is considered. Having a healthy credit score increases your chance of getting a loan or any other financing and getting it at a cheaper cost.

Paul always settles his credit card in full every month. Peter never does. His bank has had to remind him twice in a year to pay his card. That gives him a more inferior credit score.

What does the credit score predict?

Your Credit Bureau score is calculated using a formula that evaluates how well or how badly you pay your bills, how much debt you carry and how all of that stacks up against other borrowers. In effect, it tells you in a single number what your credit report says about your management of existing credit.

Making sense of it – how is your credit rating determined?

There are two main credit score calculation methods used in South Africa.

  • One scores individuals between 0 and 999.
  • Most lenders, however, use FICO scores, which is between 300 and 850.

The lower your scores, the less you stand a chance of obtaining a loan or other financing. The higher your score, the better your chances are of not only obtaining financial products but also obtaining them at a cheaper interest rate. In other words, a high score indicates a low-risk borrower, while a low score means a high-risk borrower.

Your Credit Bureau score is designed to tell the world, by way of a number, what risk the finance provider is likely to face. It’s what allows some persons to get an interest rate of 10% on credit card debt, while others will pay 22%.

You are not alone. South Africa has a problematic relationship with credit – both at a national level, where we have debt at the highest levels of society and at an individual level, where our debt are some of the highest in the world. We are a nation of borrowers – and debtors – too.

Oh dear! Can I fix it?

Fortunately, you can improve your score. Here are some guidelines:

  1. Be prompt in paying your bills.
  2. Settle your credit card in full every month. Never make minimum payments
  3. Do not open unnecessary accounts. Close those that you do not use. Someone with ten open accounts will be viewed differently with someone who has five open accounts. Every time someone checks your credit score, it can reduce your creditworthiness.
  4. Clear judgements as soon as possible. A judgement Is the result of a decision in a magistrate’s court issued because you failed to pay a debt after a demand was issued.

An annual check-up – why NFS recommends it

Keeping a regular eye on your credit score helps you to identify possible problems before they develop into severe challenges like these:

  1. Your identity could have been hacked. For instance, if Paul’s report says Edgars did a credit check, and he does not have such an account, it could suggest someone is opening an account with Edgars, trying to use his identity.
  2. It needs to reflect where you’ve made amends. Let us imagine Paul had a Virgin Active contract that lapsed due to non-payment. However, he had settled it in full. If it isn’t reflected correctly, he can and should insist that his record be adjusted to reflect the change.
  3. Errors. It could also indicate that there could be a problem with the information contained in your credit report, like an address in Paarl, where you have never lived. It could alert you to the fact that you need to investigate and possibly challenge some of the information contained in your credit report – before you apply for that all-important loan.

At which point does ‘good’ become ‘great’?

Having at least a “good” credit rating (a score of 600 and above on the FICO scale) will make a considerable difference to your life in both practical and financial terms. At this level, you are likely to be approved for most basic financial products, such as a new store account of Woolworths Credit card, although you may not be granted access to special rates and high-level products (you’ll need a score of above 700 to be considered an excellent). Conversely, a weak or very poor score (500 or less) will make it much more difficult to access credit.

Practical implications

  1. It can affect your education or that of your children. Life-long learning or reskilling mid-career is a reality for more and more people as technology drives previously considered ‘safe’ occupations to the brink of extinction. Your children will need this safeguard even more than you!
  2. Your car can only take you that far. A reliable, safe and fuel-efficient vehicle is a necessity for most. However, it is expensive, and for it not to lose resale value completely, it is best to replace it, before it reaches the point of no return. If you cannot pay full price, you will require a vehicle finance plan.
  3. Home is where the heart is. Families and individual needs change, and you may need to do alterations to accommodate this. Property can also provide you with a passive income stream, and you will need a mortgage to pay for it)

There is always hope. However, it is still good to start young, to continually improve one’s financial literacy and skills, to keep an eye on one’s credit score and to talk to a financial adviser, who will not just try to sell you more products, but can help you plan a future where you do not just survive with your lifestyle protected, but also thrive as you grow your wealth.

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