Up to 40% of applications for home loans are turned down due to problems
with the credit history or finance of the buyer. Your credit score drives
these applications. Today I've included part of an article from an affiliate
of The Property Game, Credit Health, which specialises in helping clients
understand credit scoring and where necessary rectify problems with
their own credit scoring.
What is credit scoring?
If you have tried to get credit, a loan or a bond, you may have had
your credit information graded for risk potential. This is called "credit
scoring" or "risk scoring". Credit scoring is one factor
that credit grantors use to determine if they should extend credit to
you. According to research, the better the borrower's score, the more
likely he is willing and able to repay the loan.
The "score" is a number grade reflecting your credit history
at a particular point in time. Lenders use credit scoring to speed up
the loan review process and to reduce the cost of examining your credit
information. Credit scoring also gives credit grantors an unbiased method
of evaluating your credit history.
Unfortunately, in South Africa there is no standard method of scoring.
This means that you as a consumer cannot obtain one score which is rated
according to one standard method - knowing that if your score is good,
then it will be rated as good by all credit grantors. The credit bureaus
have developed the most common scoring methods. Experian use the Delphi
score, and TransUnion ITC has developed the Empirica score. Both use
your credit data in the determination of your score. In fact, both companies
are experts in the area of credit scoring, and regularly sell the credit
grantors their credit scoring programs.
How does credit scoring work?
Your score will consider whether you have accounts in collection; whether
you have any defaults and how frequent and recent they are; and whether
you make your payments on time. How much impact each item has on your
score depends on what other information is on your record. For instance,
one late payment may not affect your score too negatively if the rest
of your history is good. In addition, you will receive points for maintaining
a good payment history.
The amount of outstanding debt
Your score will take into account how many accounts you have, the average
balances across the accounts, your current level of borrowing, and whether
you are close to or over your limits. Carrying too much available credit
can also count against you even if you are not making use of this credit.
Your credit history
Your score will take into account how long you have had your accounts,
the total number of "enquiries" and new accounts opened, and
the amount of time since your last enquiry. Credit grantors will do
an enquiry on your record when you make application for credit. Your
score will take into account the number of enquiries on your record,
as research shows that people who are expecting to run into financial
problems open up as many lines of credit as possible, to have available
in such times.
The type of credit you use
Your score will look at the diversity of credit you make use of, whether
you use credit cards, department store cards, short term loan-shark
type loans, access bonds or instalment loans.
Negative information will definitely have an impact on your credit score.
Such information includes judgments, bank and other defaults, collections,
insolvencies, rehabilitations, administration orders and notices. In
South Africa these listings have a huge negative impact on your credit
score, and it is advisable to have these removed, if possible, before
applying for credit. Use a specialist attorney to assist you with rescission
of judgments and removal of default data. There are few specialists
in this field, and we recommend Credit Health's partners, Logan Attorneys.
Copyright 2004, Credit Health (Pty) Ltd, Reg No 2004/015740/07
For more information on credit scoring including how
to find out your own credit rating and how to correct errors that might
exist on your record go to www.credithealth.co.za
for more information.