10 Credit Score Myths
A lot of ignorance and misinformation exists surrounding the credit industry and the functioning of credit bureaus in South Africa. There have also been a number of changes in recent years, mostly designed to offer additional protection to the consumer.
It is important for people to understand how the system works so that the are able to maintain a good credit rating or improve one that is poor.
Recent surveys conducted amongst South African consumers showed that the majority of people understand very little about the how credit works and even less about their own credit profile.
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There are a vast number of commonly accepted myths regarding credit reports and credit scores. Let’s take a look at a few of them and explain the facts versus the myths.
Myth 1: Only credit providers can access credit reports
Surprisingly, many people hold this belief. The truth is that you are able to access your credit report at any time.
By law, according to the National Credit Act (NCA) you are entitled to one free report from the credit bureaus every 12 months. For a small fee, you can access it more frequently and many of the bureaus offer a service whereby they update you every time there is any change or update to your profile.
It is advisable to take advantage of the free annual report in order to keep up to date with your status to proactively manage it. It will also allow you to look out for any errors or fraudulent activity or identity theft.
There are also agencies that will assist you and offer advice and counselling on how to improve your credit situation. Be careful to check them out carefully. Many of them offer a great service but as with any industry, there are a few that are less than professional.
Myth 2: Income or cash in the bank will reflect on a credit report
This is another commonly held misconception. While your income is an important factor when applying for credit, it is not information that reflects on your credit report or helps to improve your score.
There are many people with a modest income that have managed their credit very well and have a high score. Conversely, there are high-net-worth individuals with an above average income that have a very low credit rating.
Bottom line is that it comes down to how well you manage your credit and your payment habits. Although affordability is crucial, credit grantors are interested in your historical credit behaviour.
Myth 3: Qualifications and education level can affect a credit score
Education level or qualifications do not form part of the credit report and as such, have no bearing on the score.
While some financial institutions offer preferential packages to graduates, this is more of a marketing drive and an attempt to attract potential future high earners. It will not have any bearing on their credit score.
Myth 4: Credit scores can be affected by gender, race or age
While these questions are often asked they are merely for demographical and marketing purposes and in no way impact on your score. The same is true of religion, national origin and marital status.
Again, the credit report simply looks at how well you have managed your credit historically and scores you according to that information only.
Myth 5: Checking your own report will lower your credit score
The origin of this myth is understandable as people have been told that inquiries reflected on your credit report will reduce their score.
While this is true when it is a credit grantor making an inquiry, it is not the case when you make an inquiry yourself to obtain your personal credit report.
The reason for this is that they make a distinction between what is known as a hard inquiry (or a hard pull) which is when a potential lender or creditor makes and inquiry, and a soft inquiry (or soft pull) which is an enquiry made on your own credit report.
So the reality is, requesting your own credit report will have no negative impact on your score and you are encouraged to do this.
Myth 6: A poor credit score can not be improved or rectified
Ok, it is not a fast or simple process but your credit rating and score can indeed be improved, with improved behaviour and better credit management over time.
Once again, the first step is to obtain a copy of your current report and assess the problem areas. You will then have to take decisive action to make amends and improve the situation. We will go into more detail on how to do this in a later section titled – 7 Tips to increase your credit score. Be sure to read that.
There have been a number of changes recently as to how long adverse information remains on your reports. This varies according to the nature of the debt and the severity of the default. Over time, most negative data will fall away and will no longer reflect on your report or affect your score.
The other factor is that, while credit grantors are risk adverse, they still want to grant credit. If they see negative data in the past but notice that your more recent history has dramatically improved, this will count in your favour.
Myth 7: A bad credit report means I cannot get any credit or loans
A low score or poor rating will certainly make accessing credit more difficult but not necessarily impossible.
In many cases, the institution will ask for collateral for the loan or request that a third party or family member in good standing signs as a surety on the loan.
Other institutions might request a significant deposit to minimize their risk.
There are a few other options available with some credit grantors so do not give up all hope. Discuss the situation with the credit provider to see if there are any alternatives available.
The one drawback to be aware of is that, in most cases, the higher risk factor will generally result in higher interest rates.
Myth 8: Closing credit card or other accounts will improve my credit score
This is not true for a number of reasons. Firstly, let’s say you were a few months behind with your credit card payments. If your situation improves and you settle the full balance and close the account, the historical poor payment is still there.
Secondly, your credit to debt ratio is taken into consideration. If a bank has given you a credit card limit of R 15 000, for example, and your balance is R100 or zero that counts in your favour. If you close the account, the R15 000 credit effectively falls away and reduces your credit to debt ratio. Rather keep the account open with a minimal or zero balance or even use it as a separate savings account for a rainy day. This will leave you with a better credit to debt ratio.
Myth 9: Credit bureaus decide whether you receive credit or not
The credit bureaus merely keep a record of your payment history, compile a credit report and score for consumers, and provide this information to credit grantors that have permission to view your report. They do not make any decisions, only the credit provider does.
Myth 10: Companies can fix a poor credit report for you
There are many companies that can assist in an advisory capacity but they can not fix or change anything on your report. Be very wary of any company that claims otherwise.
They can explain it to you and assist you in disputing any errors on the report. They can also advise as to what they believe to be the best way to improve the report.
The only way in which you can improve your report is to manage your credit in a responsible manner and pay what is due on time.