Your Credit Score: The Basics.

Understanding the numbers.

As we get older, we begin to realise the importance of having a good credit score. You don’t only want to make sure you have money set aside for all your needs. You also want to make sure you're able to take out loans to purchase important or big-ticket items, or to borrow money in case something unforeseen comes up.

The initial phase of your credit score.

To have a good credit score, you need to be credit active. Credit activity is merely the creation of any type of loan or credit account. This means having a cellphone contract and any other accounts that typically fall under the category of revolving credit like clothing store accounts, and perhaps vehicle finance.

By taking good care with paying these accounts timeously, it will show that you pay your bills on time and can improve your credit rating.

In case you’re wondering, your credit score doesn’t start at zero. This is because your credit score is calculated only at the moment that a lender, credit card issuer, or other entity, requests to check on your creditworthiness. Before you are credit active, your credit score simply does not exist.

Building your credit score.

When building or rebuilding your credit, it's important to do your research so you can start off on the right track. It's also vital to know how your scores are calculated and which factors contribute towards making up your score.

Credit reports myths.

People are often unclear about what goes into establishing a credit score, and many people make assumptions. These assumptions often turn out to be inaccurate. It's important to do your due diligence when it comes to your own credit score.

1. Only credit providers can access your credit report: This is a false assumption. Everyone is entitled to one free credit report per year to monitor their history and check for possible errors that could affect their relationships with creditors or service providers.
2. Checking your own report will lower your credit score: This is a myth that was probably relevant years ago but today, it doesn't hold water now. If you have your credit report regularly checked on your behalf for various reasons, for example if you're looking for some help managing your debts, this will show as an inquiry on your report and shouldn't have any negative effect. A creditor checking a person's finances after being requested to do so by that same person or another party will appear as a soft inquiry, which shouldn't affect your credit rating.
3. A poor credit score cannot be improved or rectified: Improving your credit score can be challenging and tedious, but it is possible as long as you have a good financial plan in place.
4. Credit scores can be affected by gender, race or age: Personal questions about religion, nationality, marital status and living history are not part of the credit scoring process. The only thing that affects your score is your financial history.
5. Credit bureaus decide whether you receive credit or not: Credit bureaus are essentially the financial records department of your life. They compile a financial report about you that is shown to potential creditors and people who may give you a loan or mortgage. It’s the lenders that decide whether you get credit or not.

How to read your credit report.

It's always a good idea to check your credit score as regularly as you can. Credit bureaus make mistakes and making sure you're up to date will save you headaches in the future. Things that will be on your credit report are:

• Personal details: It’s very important to make sure that you double check all of your personal information, such as birth date and address details.
• Previous enquiries: Credit reporting agencies can show you live credit report inquiries made by companies or creditors that want to establish your current financial status.
• Report of all your accounts: This is a demonstration of the methods used for this report's analysis. Check your credit report regularly to detect any problems that might be occurring or accounts that you may not be aware of.

Credit report phrases.

The words, terms, and phrases that are used in the realm of finance and credit scores can be confusing. When trying to understand how to establish, improve and maintain your credit score it is important to have a knowledge of commonly used credit terms such as:

• Credit agreement: After approval, a written agreement that details the duties and responsibilities of both parties is issued. This is known as a credit agreement, or loan agreement.
• Eligibility: Loan companies and banks will take a look at a few factors before approving your loan application. The key factors they look at when making their decision include credit score, income and how much you owe on other loans. This is how they decide whether to give you a loan or not.
• Credit check: When someone looks up information from a credit bureau about you, it's called a credit check. A credit check provides an outline of your financial standing and shows how you're managing your finances. Credit checks are used by companies and other loan providers (such as estate agencies) but they do need to ask your permission before they make use of them.
• Initiation fee: An initiation fee is a payment that you make to have the loan application process take place. Most times, the initiation fee will be used to pay for the credit check and loan approval procedure.
• Principal debt: The principal amount refers to the sum of money that you originally required. Let’s say you requested and received a loan of R2,000. Your initial debt would be R2,000. Anything you pay over this will go towards paying off interest along with any other fees your service provider might charge for your loan.

Benefits of having a good credit score.

Each of the financial institutions will have different standards for what qualifies as a good credit score. It is important to be aware of your personal credit rating and always keep it in a healthy condition. A good credit score can mean it will be easier for you to secure better rates through your financial institution. This saves you money and may allow you to qualify for more loan options.

A good credit score is an important part of your financial history. A good credit score will help you secure things that you will need as you get older. Things like a car loan or a mortgage. A good credit score will affect the interest rates you are offered on other loans. We hope you enjoyed this article on the basics of your credit score. If you have any other questions or concerns about the topic, please contact Credit Health anytime.