Ultimate Guide To Credit Scores In South Africa

You might have heard about something called a credit score or credit profile, but what is it exactly and why is it so important?

Well, let’s start with your credit profile. All South Africans that are credit active have a credit profile which is basically a summary of your history with every credit provider you’ve dealt with and how well you’ve managed your credit accounts.

Your credit profile is a key tool used by lenders like Pow Wow Loans to look at your previous credit behaviour in order to assess whether you are able to take on new loans or buy on credit. It not only reassures lenders that you are good at paying back money that you’ve borrowed but more importantly, it also protects you from overextending yourself. The credit bureaus typically

summarize your credit profile info into something called a credit score. The higher your score the better your credit capacity and the lower the perceived risk of lending to you. This is what Pow Wow Loans will look at when doing a credit assessment so if you want to apply for a payday loan.

You’ll want to make sure you have a healthy credit score the first step is to review your credit profile you can view your profile on any of the credit bureaus websites once a year for free. Go and check that there aren’t any errors. If they are, be sure to correct them.

Maintaining A Healthy Credit Score

The best way to ensure a good credit score is to manage your credit lines really well over time.

So make sure you pay the required amount on time every month, don’t skip payments even if you pay double the next month, it will negatively affect your profile. As far as possible, avoid maxing out your cards and extending your credits to its limits. If you have the commitment to reducing your dependency on credit, pay off as much as you can as fast as you can.

If you’ve never borrowed money from an institution or bought something on credit it’s likely that you don’t have a credit score to get a big loan. You’ll need to change that. The only way to form

a credit score is to have credit. You will need at least three lines of credit to get a reliable high score.

When filling out the applications make sure your details are accurate to prevent any information errors. It’s also good to have an even spread of credit. Three credit cards, three personal loans

and a car loan does not come across as sensible credit. Instead, one car loan, one credit card and a store card are better.

Remember every time you apply for credit, your credit score will be checked. Too many inquiries can adversely affect your score so don’t apply for credit everywhere you go.

Submit your application today to find out if you and your credit score qualify for a payday loan

Credit Provider Requirements

Credit providers in South Africa typically have the same requirements for unsecured credit, namely:

1. Permanently employed;
2. Identification documentation (The green barcoded ID book or a passport with a valid permit);
3. Three (3) months bank statement;
4. Proof of residential address;
5. Latest payslip.

On the other hand, secured credit is backed up by some sort of collateral which can take the form of physical assets or a surety.

The Determination Of The FICO Credit Score

Understanding how your FICO credit score is determined is critical. FICO is a company that uses statistics and mathematical formulas called algorithms to determine a person’s credit score. A FICO score is the most common credit score used to determine loan eligibility and the interest rates a person pays.

A credit score is a person’s financial history packed into a three-digit number which indicates a

person’s credit risk. Your credit score is compiled of information found in your credit report. A credit report is a loan and bill payment history kept by a credit bureau. Financial institutions and

other potential credit providers use credit reports to determine the likelihood of debt repayment.

Credit scoring companies use statistics to determine the risk associated with lending. They do not use data such as sex, age, race or religion to determine the likelihood of repayment.

FICO and other credit scoring companies are always updating their formulas but here are the categories that FICO generally includes in the development of its credit scores with a rough estimate of the emphasis they place on each category.

Credit Scoring Criteria

• Payment history accounts for roughly 35 percent of the credit score;
• The amounts owed relative to credit limits accounts for roughly 30 percent;
• Length of credit history accounts for about 15 percent;
• Frequency of new credit accounts for roughly 10% and
• Types of credit used accounts for about 10%.

Let’s quickly breakdown each credit scoring category

Payment history takes into account any bills paid late, including how many payments are made on time, how late they are, how recent any delinquencies are and the total amount owed. This is where people can sometimes find themselves in trouble of credit.

The good news is that over time older entries including negative entries disappear from your credit report typically seven years for late payments and ten years for bankruptcy filings.

Amounts owed relative to limits is your debt to credit ratio. Say you have five credit cards each with a ZAR20,000 credit limit, that means you’ve got a ZAR100,000credit limit. You may only be using 10% of that and that’s positive. However if that means you’ve maxed out on one card that’s negative it’s best to keep your debt to credit ratio below 50%.

Length of credit history takes the average length of time you’ve had your credit card accounts into consideration. The longer history you have of making payments on time the better your credit score.

Frequency of new credit is important because if you have a lot of newly issued credit in your credit history whether new loans are new credit cards,lenders may be concerned about your ability to repay all of that new debt. Therefore, they will be less likely to lend you money.

When examining types of credit used, lenders prefer to see that you’re capable of handling different types of credit. So someone who only has credit card debt will probably not have

as good a score as someone who has demonstrated good payment habits on installment loans, mortgage loans and student loans as well as credit card debt.

All of this is important because your credit score affects your ability to rent an apartment, buy car insurance at lower premiums, gain employment and obtain credit at lower interest rates.

That’s right a group credit score will save you money

Here’s an example, Nandipha Khumalo and Peter Samuels are applying for a ZAR10,000 loan. Both look like qualified candidates, they both live in the same city and work at the same company.

Let’s see if their FICO score tells the same story…

Nandipha Khumalo pays all of her bills on time and in full. She usually uses about 10% of her total credit limit and she’s had the same credit cards since university.

Peter Samuels on the other hand frequently forgets to pay his bills on time. He uses over 50% of his credit limit and when he maxes out a credit card he opens a new account.

Who do you think would have a higher credit score and as a result be more likely to obtain a loan

with a better interest rate?

That’s right Nandipha would because her credit score is closer to 800 whilst Peter’s is closer to 600.

Suppose that Nandipha received a twenty one percent (21%) simple interest rate on the ten thousand rand loan while Peter received a thirty two percent (32%) simple interest rate over the course of a year.

Nandipha would pay two thousand one hundred rands (ZAR2 100) in interest while Peter would pay three thousand two hundred rands (ZAR3 200) in interest. That’s one thousand one hundred rands (ZAR1 100) more interest than Nandipha.

Peter could have saved or used that one thousand hundred rands to purchase something else.

So your credit score does matter.

Recap Of How To Maintain A Good Credit Score

1. Let’s recap to maintain a good credit score pay all bills on time and in full. This way you avoid late fees;
2. Avoid opening new credit card accounts or installment loans
3. Keep your debt to credit ratio low
4. Don’t cancel your oldest credit cards as length of credit history is important and;
5. Remember to monitor your credit reports, by law, credit bureaus  must provide you

with a free credit report every year.

The Main Credit Bureaus In South Africa

The main credit bureaus in South Africa are Experian, TransUnion, CompuScan and XDS.

You are entitled to a statutory free credit report every year. You can obtain these free copies by visiting the credit bureaus websites. These reports may vary slightly from each other. So it’s important to check all four now you understand a little more about how a FICO credit score is

determined.

Another popular resource used for checking credit reports is Clearscore.

What To Do If There Are Mistakes On Your Credit Report

Reviewing your credit report is highly recommended as it gives you an overall view of your personal financial situation and can correct any mistakes. To correct the mistakes you can directly raise a dispute here.

History Of The FICO Credit Score

Today FICO is known throughout the world for helping businesses make the most precise decisions possible with regards credit provision. FICO protects two-thirds of the world’s

credit cards from fraud. They work with all of the major banks in the world and they help organizations and insurance, retail, health care, government and other industries to improve customer engagement, streamline operation, ensure regulatory compliance and drive profitable growth but before we transformed entire industries and change the way businesses make decisions.

FICO was the vision of two smart guys with a borrowed computer, Bill Fair and Earl Isaac met at Stanford University in 1956 with just $400 apiece. They started their own company in a San Francisco apartment, and named it “Fair Isaac  Corporation” FICO.Their goal was to use mathematics and computers to help businesses make better decisions. With Bill’s head for business and Early’s genius with computers they pioneered the use of credit scoring using algorithms to study past customer behavior to predict a credit risk of a new applicant.

The company wrote letters to the 50 largest American lenders asking for the opportunity to explain

credit scoring one respondent and the first credit scoring system was built throughout the 60s and into the 1970s

FICO Changed The Game

FICO popularized credit scoring and predictive analytics, one lender at a time. It challenged those lenders standard practices and sometimes their prejudices. FICO proved time and again that race was not predictive of credit performance and refused to put it in their scorecards. Their efforts later

earned Bill Fair and Earl Isaac the Distinguished Service Award from the American Bankers Association. They also continued to innovate creating the first fully automated application processing system. This innovation continued into the next decade as FICO applied the science of active control to customer management with the first automated credit account management system which paved the way for the explosive growth in credit card use in the years that followed.

This is known today as FICO Triad Customer Manager, the system now manages most of the world’s credit card accounts. In addition to expanding the scope of its technology, FICO also extended its reach globally, opening its first international office in Europe in the early 80s. That was followed by offices in Asia, Latin America, Africa, the Middle East and eventually expanding to more than 30 locations around the globe from Malaysia to Lithuania to Fairfax, Virginia.

The 1980s also saw an innovation that would forever change how lending decisions were made with FICO’s launch of its first general-purpose credit bureau score. Today FICO scores continued to be virtually synonymous with credit risk scores and are used in more than 10 billion decisions a year.

There were two more innovations in the 1990s that transformed business decisions. One was

the development of FICO Falcon Fraud Manager which detects credit card fraud using neural networks. It’s said to be the most successful commercial use of artificial intelligence ever and today it protects two-thirds of all credit card transactions worldwide.

The other key technology was decision rules management and FICO’s  award winning Blaze Advisor became the most powerful rules management system when it launched in 1998 giving businesses a fast flexible way to govern the rules behind their business decisions.

FICO’s pioneering work also took important strides forward for consumers in the early 2000s consumers were able to buy their credit scores for the first time with the launch of myfico.com

and more recently FICO introduced the FICO Score Open Access Program, letting banks give away the FICO score to their customers helping millions of consumers better manage their credit health.

Do You Know Your Credit Score?

Do you currently know your credit score? When last did you check your credit report? Share with us any awkward experiences in reviewing your credit reports, in the comments area.

If your interest in your credit score is for the purposes of borrowing a short term loan, at Pow Wow Loans, we offer unsecured loans of up to ZAR 4 000 with up to 90 days to pay. True, there are many service providers out there but we’re sure you want a good one with professional touch, Pow Wow Loans has it. Apply today for your short term loan.