BondCredit.co.za

By Credit Health (www.credithealth.co.za)

A credit score is a summary of a number of positive and negative factors on your credit report that aims to predict how likely you are to honour your credit commitments in future. This rating is often used by lenders to identify the risk in offering you credit.

Are all credit scores the same?

No. There is no single credit score. TransUnion provide an Empirica® credit score on request. Experian have developed the Delphi® score and include it in all their credit records.

The Delphi ScoreL

Experian makes use of the Delphi® credit score that ranks your credit rating. This score will only appear on an Experian credit report. The score is calculated by a computer programme that takes all your credit profile information and converts it to a simple three digit number or “score”. The Delphi® score number will range between 0 and 750. Based on Experian Credit bureau data, the higher the number the more likely you are to meet your credit commitments in future.

The Empirica score:

Fair Isaac & Co developed a credit measurement tool in the 1950’s called the FICO® score. This score has become the basis for most other credit scores and the Empirica® score used by TransUnion is largely based on it.

How is a credit score arrived at?

Generally a credit score evaluates five main categories of information:

Payment history ( 35% of the overall score)

• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.).
• Presence of adverse public records (insolvency, administration, debt counselling, judgments, bonds), collection notices, and/or adverse information concerning payment or non-payment.
• Severity of arrears (how long past due).
• Amount past due on arrear accounts or collection items.
• Time since arrear items, adverse public records (if any), or collection items (if any).
• Number of past due items on file.
• Number of accounts paid as agreed.

Amounts owed (30% of the overall score)

• Amount owing on accounts.
• Amount owing on specific types of accounts.
• Lack of a specific type of balance, in some cases.
• Number of accounts with balances.
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts).
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).

Length of credit history (15% of the overall score)

• Time since accounts opened.
• Time since accounts opened, by specific type of account.
• Time since account activity.

New credit (10% of the overall score)

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
• Number of recent credit inquiries.
• Time since recent account opening(s), by type of account.
• Time since credit inquiry(s).
• Re-establishment of positive credit history following past payment problems.

Type of credit used (10% of the overall score)

Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).

Each of the above noted factors, along with others, are assigned a value and a weight. Different creditors assign different values or weightings, depending on their experience of how important each of these factors are in their market.

The results of these factors are then added up and combined into a single number. FICO® based scores can range from 300 to 800. The higher the number the better.In general terms, borrowers with reasonable credit typical have FICO® scores, which range between 600 and 800.

Company specific score cards

Very often creditors will use a credit bureau score together with an in-house score card, where they build their own credit score to aid in their decision making process.

Creditors will take different factors into consideration when building a credit score, based on the company’s specific credit granting policies. These scores differ between lenders and may even differ between the type of credit you apply for e.g. home loan, credit card etc. Often lenders will make use of credit bureau data, their own internal data and affordability data, such as the ratio of installment to income, to build a company specific credit score.

Why does my credit score change?

Your credit score is dynamic, it can change monthly as new information for the accounts you hold is loaded to your record. It is important to note that a minor change to your credit score is not likely to affect your ability to gain access to credit. However, a significant change can occur if negative information such as a judgment or serious payment default is loaded to your profile.

What minimum credit score do I need to gain access to credit?

There is no minimum credit score. Companies will take different factors into account when making the decision to grant credit, depending on their specific credit granting policies and appetite for risk. The acceptable credit score range is specific to the company that is granting you credit. So, if one company declines you for credit this does not mean that another will also decline you for credit.

Why is it important to use a credit score in the credit granting process?

A credit score looks at many different pieces of information and takes a fair view of both positive and negative information. This helps lenders in making responsible and impartial decisions about granting you credit, by removing bias in the credit granting process. It also improves the speed in which the decision to grant credit can be made.

Remember, a credit score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score. The value of the information lies in looking at all the pieces of information collectively.

The importance of any factor depends on the overall information in your credit report. What is the general impression of your credit record? Does it reflect poor payment patterns or is it showing you stick to your payment obligations.

For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score.

Thus, it’s impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one person or market over time.

Your FICO score only looks at information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.

While your credit record and the resulting score is important, creditors look at many things when making a credit decision including your income, your expenses, how long you have worked at your present job and the kind of credit you are requesting.

Your score considers both positive and negative information in your credit report.