From the pen of Karin Iten…

Dear Investment Academy Reader,

With credit being tight right now, getting a loan is hard. And since more and more institutions have access to your personal financial records a bad credit rating could be the very thing that stands in your way to getting the best possible interest rate. Or even worse, having your bond or car loan application denied.

That’s why it’s become so important to understand what your credit rating is, as well as how to improve your present score. Here are our top tips to doing just that.

Five factors that determine your credit rating...

Credit bureaus tend to base your credit risk on five factors:

1. Payment history (35%):
Do you pay your bills on time? Obviously, on time is better, and being late becomes progressively worse depending on how late, how frequently and how recently the event occurred.

2. The amount of money owed (30%):
What is your credit limit and how much have you used up? In some cases, your score can hurt you if you accept a credit limit increase offered by a credit card issuer that’s slow to report the new limit. If the lender doesn’t immediately report your new limit, a high balance can show up as exceeding your credit limit.

3. Types of credit in use (10%):
Lenders like to see a mix of debt beyond credit cards. A bond or a car loan shows you can handle your money. But be warned, getting credit from a finance company will appear as a black mark on your record (one way to tell a finance company from a bank is that banks generally offer cheque and savings accounts; finance companies don’t).

4. New credit (10%):
When you apply for credit, the prospective lender calls up your credit report and the credit bureau makes a note of the inquiry on your record. Too much activity on your account will make potential lenders nervous. Statistically speaking, someone seeking a lot of credit in a short time is inherently riskier than someone who isn’t.

But what about shopping around for the best loan? you ask. Your rating won’t be penalised if you’re hunting for an auto loan or a bond within a short time frame. But your score will be affected if you shop around for the best credit card or personal loan deal by applying for it.

5. Length of credit history (15%):
When a credit card company offers you a higher limit, it’s like another ball in the air for a juggler. Can you handle the added burden? The credit bureau presumes you can’t, until you prove over time that you haven’t taken on more than you should and can continue to make payments on time.

Seven strategies to improve your rating!

1. Make loan payments on time and for the correct amount.
2. Avoid using more than your available credit limit.
3. Never ignore overdue bills. If you encounter any problems repaying your debt, call your creditor to make alternative arrangements.
4. Make sure you don’t have a credit card from a financing company, as this can negatively affect your score.
5. Open numerous store accounts and be sure to pay these accounts on time – this can dramatically increase your rating!
6. Keep your outstanding debt as low as you can. Continually extending your credit close to your limit is viewed poorly.
7. Limit the number of credit applications. When another company looks at your credit report, it’s viewed negatively.

Bottom Line:
Three months before you apply for any kind of a loan, get a copy of your credit information. Visit www.mycredit.co.za to apply for your annual report – free. If your credit information is inaccurate in any way, contact TransUnion on 0861 886 466, and ensure the information is corrected BEFORE you apply for a loan (or you could run the risk of being denied!). Remember to include any additional information too. The more information you can provide about yourself, the more comfortable lenders may feel extending credit to you. And certain information - such as having the same job or address for a few years - can make you appear to be more stable in lenders’ eyes. Make sure the bureau adds the following:

*** If you’ve had your current job less than two years, your previous employer and job title should be listed as well.
*** Is your address listed and correct?
*** Is your identity number listed and correct? This is the way most lenders will identify you.
*** Is your telephone number listed and correct? Many lenders may not extend credit if they can’t call to verify your information.
*** Does your report include all the accounts you’ve paid on time? You can send a letter to the bureau with a copy of your latest statement and cancelled checks to prove you’re paying on time.

Here’s to your financial freedom,

Karin Iten
for the Investment Academy