How to build your credit score …

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JIMMY MOYAHA: It’s Personal Finance time on a Monday. This week we are looking at credit scores. It’s something that we have looked at in the past, but not in much detail. I thought at the start of the year this may be something of a priority for many of us going into the new year – how to potentially navigate the credit world and how to make the most of some of the insights we learn from here.

I’m joined on the line by the head of Credit Risk Solutions at TransUnion, Fatgie Adams, to look at this and what to make of it. Fatgie, lovely having you on the show. Thanks so much for taking the time.

Let’s start with an overview or an understanding of the importance of a credit score. What is it used for and why does it matter to us as consumers?

FATGIE ADAMS: Hi Jimmy. Hi to the listeners, and thanks for having me. Yes, I agree with you. It’s actually a very fitting time to be discussing credit scores, especially with people setting their New Year’s resolutions. Personally, one of my resolutions is improving my credit score. So I think it’s the perfect time.

But for most of the listeners out there who aren’t aware of what their credit score actually is, it’s typically a simple three-digit number. What this three-digit number does is to give you a view on how you manage your credit. You have created it in the past.

I like to think of it as your financial reputation. This figure gives you an indication of how you’ve managed your finances in the past.

Quite interestingly, a lot of people think that it’s just something used when applying for a home loan, but it actually affects so many more things in your life and your everyday opportunities.

Something like a good credit score could give you access to reduced interest rates, quicker approvals and even better credit terms when you’re applying for normal traditional credit like a credit card or any kind of revolving credit.

A weak score is something that would potentially affect you and could even result in your being declined any kind of credit application. So the use of the credit score spans further than just applying for a home loan.

JIMMY MOYAHA: Fatgie, let’s look at some of the own goals we tend to score in the credit world. What are some of the things that consumers might not know could negatively affect your credit score?

FATGIE ADAMS: What really impact your credit score are things like how good you are paying your credit. So any existing credit products that you might have – how are you paying them? Are you paying them on time or are you missing payments?

Are you making a high amount of applications for credit in a very short period of time, because that gives the lender an indication that you are potentially a risky customer because you’ve this huge need for credit within a very short period of time.

Or there are things like you are over-using the existing credit that you do have by exceeding your limit, for example, and your credit – and kinds of retail or revolving credit that you might have.

These are the things that really change your credit score.

I think some of the myths that we really need to bust when talking about credit scores are things like checking your score on a regular basis impacts your score. In fact, we’ve seen in our Q4 report that some 57% of individuals check their score on a monthly basis, and these individuals usually show a better score because they’re managing their score well because they’re checking it regularly to ensure that what’s reflective on this score and within the reports is a true reflection of the reality.

JIMMY MOYAHA: Fatgie, you mentioned credit scores and checking those scores. I want to get into the concepts of ‘hard enquiries’ and ‘soft enquiries’. What do those mean, and how do they differ when it comes to your credit score and your credit profile?

FATGIE ADAMS: Typically a hard inquiry would be if I or even you, Jimmy, go into any kind of lender and apply for some form of credit.

This is an inquiry that obviously leaves a stamp on your credit report. Among the factors that make up your score are your enquiries. But to my previous point, there’s nothing wrong with these hard enquiries. It’s all about the frequency and the number of enquiries you do in a short period of time.

‘Soft enquiries’ are things that are done just to do an assessment or to check your score, but not necessarily an enquiry for any kind of credit product.

So there is a difference between the two. As I said, there’s nothing wrong with enquiries. It’s just a matter of not doing too many of them in a short period of time, because that would indicate some form of over-appetite for credit, which could be because of stress and show signs of a potentially risky customer – which is a red flag for most lenders.

JIMMY MOYAHA: Fatgie, what if I’m shopping around? What if I’m buying a car and going to three or four different car dealerships because I might like three or four different cars and I just want to find out which would be best suited for me. Would that be a positive on my credit profile, or a negative? Is it something that’s advisable, where it relates to how many of those enquiries will then go through?

FATGIE ADAMS: Typically I would advise any consumer who is in the market to start by checking your profile yourself.

TransUnion has a platform that allows individuals to log on to our platform and view your credit score.

Once you’re familiar with your credit score and you understand what the credit score actually means, it gives you a good indication of your creditworthiness.

I think this really puts the consumer in a position of power, because if I walk into a dealer and I know I’ve got an excellent score, that puts me in a position to potentially get a better interest rate and be to negotiate with the terms because I have confidence that I’ll be approved for the credit that I apply for.

Going in there and not knowing leaves you at the mercy of the credit provider, who would then be able to dictate terms to you.

So, to your point, many people shop around and, depending on whether it’s a hard or soft enquiry, for most of the lenders, specifically in vehicle finance, you’d get an aggregate. It wouldn’t hit multiple times, but you’d be able to get a view upfront from multiple credit providers of your creditworthiness.

But again, to my previous term, it all starts with you taking control and power and understanding what your score is. That means checking your score regularly as an individual, and not only when you perhaps want to purchase a car.

Like I said, my goal is to improve my credit score over time. It’s one of my goals. So if I know that I’m going to be purchasing a car, or would want to purchase a car within the next six to eight months, I’m not going to start checking it in six to eight months’ time. I’ll start way before that to ensure that if I’m not happy with the score that I’ve got I can take the corrective measures to improve my score, which puts me in a better position when I do start shopping around for that vehicle and making applications.

JIMMY MOYAHA: That’s interesting, Fatgie, that you mentioned that we should be checking these scores. Perhaps we could use this opportunity to debunk another myth – cost.

Can I check my credit score for free? Is it going to cost me a lot? Is it something that I can do myself? Do I have to go through a third-party provider? These are questions that we often have, primarily because there’s not only one place to get a credit score, first and foremost, but there are also intermediaries and other individuals between ourselves and companies like TransUnion which then say, oh, but a credit check requires an amount of money and all of that. Let’s debunk that misconception and get into how it is that individuals can take ownership of their own credit journeys.

FATGIE ADAMS: TransUnion allows you to check your credit score for free at least once a year. But to your point, there are many third parties – and even most of the banks you currently hold your transactional account with – that also give you access to your credit score.

Again, like I said, checking the credit score is an important factor. It’s actually the best way to ensure that there are no bad actors performing any kind of fraud on your profile, because checking not just the score itself, but the full report – which again you can access through TransUnion – allows you to check if there have been any enquiries made on your profile that you aren’t aware of.

It allows you to check that the payments you have made are reflected and on time, but it also allows you to check any accounts that were potentially made in your name or opened in your name that you’re not aware of.

So, like I said, it’s one of the best methods to prevent any kind of fraud on your profile, which could then stop you from getting credit in the future – because if someone’s committing fraud on your profile it’s going to [negatively impact] your credit score.

As I said, you can definitely get a credit report from TransUnion which will be reflective of all the activities on your profile, as well as some third parties. And your bank most likely will give you access to your credit score as well.

JIMMY MOYAHA: Fatgie, let’s talk improvements. You touched on this, saying that this is an area that you’re focusing on personally this year. I can imagine it’s an area many South Africans are looking to on a constant basis, because nobody in South African history has ever said ‘My credit profile is good enough’. I suppose there might be a very small proportion of people who have, but for many of us it is something that is a constant work in progress. How do we start to tackle the low-hanging fruit? What are some of the easy wins that can improve a credit profile, and what are some of the good things we should be doing?

FATGIE ADAMS: First and foremost, take ownership and check it periodically. So look at your credit score, look at the full report and manage your limits. Don’t overspend on the existing credit limits that you do have on your credit card or any kind of revolving account that you might have.

Try to limit the number of applications you’re doing for credit as well, because, as I said, that’s definitely a red flag.

If you also look at the mix of credit that you have, having too many of a specific type of credit can show some form of risk.

But the main thing is just knowing, understanding the credit score, knowing what makes up the credit score and then managing it properly.

Like I said, if you know you’re looking to be shopping for a vehicle or for home finance, quite early in the process start looking at your credit score and start taking the corrective measures like paying all of your accounts on time. If you can pay extra, do that as well, because that’s definitely something that counts in your favour when your credit score is calculated.

JIMMY MOYAHA: The more you know, folks, especially when it relates to credit scores, the better. We’ll leave the conversation on that note. Thank you so much to the head of Credit Risk Solutions at TransUnion, Fatjie Adams, for joining us to look at credit scores, what they mean and how to make the most of them.

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