22 Aug 2011

Credit Reports and Credit Scores: Beginners Guide

Credit Report, Credit Score No Comments

Tristan Powys (Credit Manager) @ Lucid Living

You may have heard the terms credit report and credit score. Consumers who hope to borrow money may know that the lending industry uses credit reports and credit scores to help determine whether they get approved for a credit card, home loan or vehicle finance. But what exactly is a credit report, what is a credit score, and why are they so important?

1. Lenders look to credit histories. Before lending money, banks and other creditors look to a consumer’s credit history – basically a record of whether or not you’ve paid your accounts – to make sure the borrower is likely to repay them. That credit history, contained in a consumer’s credit report, determines how much credit is made available to you and under what terms, such as the interest rate and the term of the loan.

2. Consumers should care about credit. Therefore, it’s not only lenders that should care about past use of credit. “Credit reports matter to consumers because lending decisions are based on them,” says Susan Thomas, spokeswoman for credit bureau Experian. “When you’re applying for credit – whether it’s a clothing account, furniture account or personal loan – lenders want to know your credit risk level,” continues Thomas. “In other words, if I give this person a loan or credit card, how likely is it that I will get paid back on time?”

3. Credit bureaus track borrowing behavior. The three major credit bureaus in SA are Experian, TransUnion ITC and XDS. These companies keep records of how you have previously behaved when loaned money, such as whether you paid it back on time, who you still owe money to and how much you may still owe. Where does that information come from? “We acquire data from public records and companies who have a relationship with the consumer and with the credit bureau (i.e. existing creditors, companies with whom the consumer has applied for credit and collection companies),” says Experian’s Thomas.

4. Credit reports include several types of information. A consumer’s credit report contains four types of information on the borrower: identifying information (including name, address, phone number, Identity number, employer and spouse’s name), account history (individual account information such as the date opened, credit limit or loan amount, balance, monthly payment, payment status and payment history), data from public records (such as administration orders, sequestration orders, monetary judgments) and a record of inquiries into your credit history.

5. Some credit report information could be wrong. A look at your credit report may reveal that it contains some incorrect information. It’s important to address these errors since they could hurt your ability to borrow money. If you find any errors in your credit report, get them fixed immediately. You will need to contact all the credit bureaus that included the error and the creditors that supplied the inaccurate information – often a time consuming, expensive and frustrating experience. You can do this yourself, but the experience is pretty much like a visit to the Department of Home Affairs OR you can get Lucid Living to do it for you. Contact us and save yourself the hassle.

6. Credit report data used to calculate credit scores. Your credit score sums up your borrowing history. Lenders look at your credit score to determine how you rank as a borrower. “A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time,” says Mike Watts, spokesperson for Fair Isaac. “A credit score helps lenders evaluate your credit report and estimate your credit risk.”

7. The credit score. Each year, millions of lending decisions are made using credit scores, which use a formula to convert a consumer’s credit history into a three-digit number ranging from 0 to 999, with a higher number indicating a less risky borrower. While lenders use credit scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product.

8. Credit report and credit score. Under laws outlined in the National Credit Act, credit bureaus must provide consumers with a free copy of the borrower’s credit report once every 12 months. Certain credit bureaus like Experian and XDS include the credit score in their credit report. TransUnion ITC on the other hand does not.

9. Service providers, employers may also consider your credit report. It’s not only banks and credit card issuers that may consider your credit report. “Most lenders as well as many service providers and employers utilize consumer credit report information in assessing applications for credit, services and employment,” says Steven Katz, director of consumer education at TransUnion. In other words, credit reports impact more than just applications for credit – they may also matter when you are purchasing a cell phone or applying for a job.

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