Most people know that the way they manage their credit is tracked, but don’t realise the role a credit record will play in their future financial wellbeing.
“A credit record is the documentation detailing payment history of current and previous debt,” says Nico van Staden, Head of Credit at FNB Credit Card. “Credit providers, including banks, retailers and personal loan companies are required by law to submit information on your credit repayments to the credit bureaus,” adds van Staden.
On a monthly basis a credit provider will supply the bureaus with detailed information on your loans. This includes what date you opened the loan, amount borrowed, outstanding amount and monthly instalment. Details such as frequency of payments, any missed payments, overdue accounts or judgements against you are also reflected in your profile.
So why is a credit record so important to you?
The information on your credit record is used by service providers to assess your affordability and risk profile. Any missed payments reflect on your credit profile. For example, if you miss payment and catch up the following month, the missed payment will be recorded at the bureau and stored for 24 months. The bureau record will show that you are up to date but missed payment the previous month.
“A credit record that shows you manage your loans badly, by frequently paying late, missing repayments or have any judgements against your name will make it difficult to get credit. In addition, this can impact the interest rate you pay on new credit as you will be considered high risk,” says van Staden.
A bad credit record can potentially compromise access to finance for important life events such as access to a home loan, car finance or personal loan. Furthermore, if your child needs a study loan, this could be a problem as the parents credit record is taken into account.
How to keep your credit record healthy
Make sure that you have a solid budget in place and carefully monitor your spending habit. Also avoid taking credit for unnecessary expenses.
You are allowed to access your credit record profile for free once a year, take advantage of this. This is a good exercise to see if there are any defaults or judgments listed against your name, or if there is any incorrectly listed information on your profile.
Have a debit order loaded on your account for repayments. This is the easiest way to ensure that you don’t miss a repayment. Avoid reversing legitimate debit order on your account when you are financially strained as this will reflect on the bureau.
What to do if you have a poor credit record
Firstly, try to catch up on any payments where you are in arrears. This will mean changing your spending habits in order to achieve the end goal.
“Speak to your bank or credit provider if you are not managing, they may be able to help restructure your repayments,” says van Staden.
Once you have caught up on your arrears, you will need to start paying back the short term credit facilities that you have such as credit card, store cards or personal loans. Start with the loan with the highest interest rate and do not be tempted to take out more credit once that loan has been paid off.
This will show credit providers that you are willing to pay back loans.
“Cleaning up your credit record is a long process, it can take up to two years before your record is clean again,” concludes van Staden.