Having a poor credit record can limit your choices in life. You might struggle to get a bank loan or open a new account. You may even lose out on a job opportunity. A good credit record lets you borrow more at better rates, as creditors have reason to believe that you will be on time with your payments. It is an indication of how responsible you are – you just need to know how the system works, and how to make it work for you.
How does your credit rating work?
Your credit record is a profile of your recent credit history. Each time you open an account, make a purchase on credit or miss a payment, that information could end up on your credit record. Credit bureaus collect this information.
Whenever you apply for credit or a loan at a financial institution, that institution will pay the credit bureau for your credit record to see how “credit worthy” you are. That information, combined with your income, will help the institution to decide whether to grant you the credit you have applied for. This is also the case when you want to open a retail account or get a cell phone contract. Additionally, a company that is considering hiring you might look at your credit record to get an indication of how organised and reliable you are.
Simply avoiding credit is not a solution. If you have never had a loan, credit card or retail account, you won’t have a credit record at all. While this doesn’t theoretically count against you, it doesn’t count for you either. Some institutions will not even bother to consider you if you don’t have a credit record.
What you can do to improve your credit record
Check your credit record regularly. Under the National Credit Act of 2007, credit bureaus are legally required to offer you one free credit report per year. Make use of this service and see what they are saying about you. South Africa has three major credit bureaus – TransUnion, Experian and XDS – and as each of these has a different scoring system, get a report from each one.
You are entitled to dispute a record that you think is incorrect. If you find any errors or out-of-date information, correct it immediately by contacting the bureau and supplying them with the correct information. The bureau is obliged to verify and update the information within 20 days.
Build a good credit rating. If you don’t have one yet, get a credit card with an interest-free payment plan or low interest rates. Use it responsibly and always pay your account off in full and on time. Just using it a few times (and paying it off punctually each time) will make a difference.
Become more organized. Make a concerted effort to pay your bills on time, and try to always pay more than the minimum. Develop an efficient filing system so that you never lose bills before you have a chance to pay them, and schedule time every month for dealing with your finances. Look into internet banking – the convenience will relieve some of the nuisance of paying your monthly bills.
Avoid applying for too much credit too quickly. All your credit applications are recorded for a while, and banks will always check to see whether you are applying at a lot of different places before they grant an application. If you are denied an application, wait a while before applying again – use the time to build up your credit rating in the meantime.
If you have any debt that you are struggling to pay, contact the creditor and try to negotiate a new payment plan. Many companies and institutions will happily accommodate you if you make an effort to communicate with them.
Always be honest and open about your debt, especially with yourself. Never lie on an application, and never ever ignore a demand for payment or a court summons. Having debt or a bad credit record may be embarrassing, but dealing with it openly from the start is the best way to get set things straight again.
The part-time University of Cape Town Personal Financial Management short course is presented online throughout South Africa and starts on 29 August 2011. You can win a place on this course with Justmoney.co.za and GetSmarter, click here for more information.