What can you expect to learn in the credit health education series?
Key Outcome: Learning how to read and understand a credit report will give you the power to know exactly what your credit status is, and what financial and credit potential you have available.
When used responsibly, credit can be a helpful financial tool. Whether it’s taking out a home loan, securing financing for your business, or buying a car with manageable repayments. Access to credit can also help you deal promptly with unexpected, costly emergencies and can offer peace of mind when travelling.
But, when not managed correctly, credit can also lead to crippling debt. It’s important to understand how credit works so you can use credit responsibly. Using credit wisely will help you establish a positive payment history and open up doors to take advantage of future credit including car loans, home loans, credit cards, and personal or business loans. Your credit habits will directly affect your credit report and credit score, which, in turn, impacts everything from future insurance costs to employment opportunities, and housing options.
Ready to get started? Let’s get going below.
Shortcut to the articles in the credit health series
Article 1 – Credit Report Basics
Outcome: Learning how to read and understand a credit report will give you the power to know exactly what your credit status is, and what financial and credit potential you have available.
1. Basic credit health keywords
Credit providers and assessments will often be filled with plenty of overwhelming and confusing terminology, but we’ve put together an easy-to-follow breakdown of everything you need to know about credit health terminology.
Before you can understand your credit report and its findings, you’ll need to familiarise yourself with what a credit report is, what information it’ll present, and how to review it. We’ll be taking a look at everything you need to know about credit reports in our comprehensive credit report course.
Learning to read and understand your credit score is the first step in getting to grips with your credit report. We’ll give you the tips and tricks when it comes to learning about credit reports to give you a head start on your credit process.
The first step in getting credit is to ensure that you have a suitable credit record for credit lenders to view.
Your credit report will contain information on all your current credit accounts, including the type of account, the creditor’s name, the current balance, your total credit limit, payment history and the date the account was opened. These open accounts and their current status will determine your credit score.
Your credit report will contain information on all your past credit accounts, including the type of account, the creditor’s name, your payment history and the date the account was opened and closed. Closed accounts within the last 6 years will be considered when determining your credit score.
If anyone has checked your credit in the past 2 years — for example, landlords, employers, and financial service providers — it will appear in your credit report under enquiries.
If any creditor has taken adverse action against you it will appear in your credit report. This includes denial of credit, insurance, or employment as well as reports from collections agencies or judgements.
While exploring your credit report, there are important things to look out for. These key things to look out for will help you troubleshoot your credit report. Look out for red flags such as mistakes, outdated account information, and outdated judgements.
Credit Bureau Score Ranges
Noticing a difference between credit scores from different companies? Here’s why you’ll find a number of different credit scores during your personal finance journey. Mistakes happen and not all credit bureaus get it right, so it’s important to assess and review your credit report for any mistakes or errors.
2. What is a credit report?
A credit report is a background on your credit history and financial situation and will reflect a score based on your credit habits. A credit report shows how you have managed past debts, what you borrowed the money for, and whether you paid it back on time or not. This helps creditors get a glimpse of your ‘creditworthiness’.
Credit scores are calculated by the three nationwide credit bureaus. These include Experian, TransUnion, XDS, and Compuscan. Each bureau has a slightly different way of calculating your credit score. But, it all comes down to the same principle (i.e. a score based on your credit habits). You have one free credit score from each of these three credit bureaus per year.
What is the difference between a credit bureau and a credit report reseller?
A credit bureau collects and stores your credit history from credit providers and lenders. Data collected and stored includes any accounts or loans in your name, loan balances, and how responsible you are with your repayments. They also record information on any action taken against you if you haven’t paid your accounts.
Credit bureaus gather your credit history into a report as a reference for lenders to use when assessing any credit you apply for.
On the other hand, credit report resellers buy consumer credit information from credit bureaus to resell it to anyone who can show a valid reason to check such sensitive information. The requester could be a prospective employer, a bank, or the consumer themselves.
3. Why are there credit reports?
Credit scoring and credit reports have been used for much of the credit industry in South Africa. South African banks, clothing and furniture retailers, specialised lenders and insurers all use credit scores.
In the mid-2000s, The National Credit Act, and with it the National Credit Regulator (NCR) came into force to help encourage responsible lending and borrowing. This legislation was put into place because South African authorities realised that credit was being used mainly to buy consumables, rather than leveraging credit to gain something of value.
Furthermore, in 2008 a worldwide financial crisis put a spotlight on irresponsible lending. Essentially money was lent to people who couldn’t repay it. It caused international repercussions. Economies from all over the globe suffered because of this. Ever since then, lenders have stepped up the criteria for eligibility for credit. A person’s credit score is one of the ways in which their eligibility for more credit is judged.
In South Africa, the National Credit Act, and NCR were designed to curb the excesses of the credit industry and promote responsible lending. Lenders were obliged to check that borrowers could afford what they were borrowing by doing an affordability assessment and accessing a credit report detailing the borrowers’ credit history.
Read more about this in the source: The History of Consumer Credit Legislation in South Africa, Jannie Otto.
Why do you need a credit report?
Credit bureaus gather your credit history into a report for lenders to use when assessing any credit you apply for. Financial service providers will use this report to determine if you can afford to repay your debt and whether you should be approved for credit. They will also use the report to determine your loan terms if your application is accepted. If you’re looking to apply for credit from a legitimate credit provider in South Africa, it is important to understand what your credit report could be saying about you.
4. What is a credit score and how is it different from your report?
Your credit score is a number attached to your personal credit report, which is calculated based on your ability to pay back any money borrowed. Your credit score is a number that ranges from 300 to 850. The higher the score, the better you look to potential lenders. Having a healthy credit score is essential if you want to borrow money to buy a house or a car, or get a cellphone contract or open a clothing account.
A credit report is a background on your credit history and financial situation. This credit report shows how you have managed past debts, what you borrowed the money for, and whether you paid it back on time or not. This helps creditors get a glimpse of your ‘creditworthiness’.
Simply put, lenders would like to know what the risks are before they loan money to someone. Your credit score will serve as a measurement for your credit health. The lending industry hinges on the ability of customers to repay. Lenders lose money (and they lose big) when borrowers can no longer repay them.
The best thing you can do to build a good credit score is to ensure that you pay your debts on time.
Longer credit history also means a higher score. For example, keeping an old credit card active, even If you don’t use it, can be beneficial. A long-standing card that proves good credit habits can go a long way in the future.