There are very few South Africans who are in a position to purchase property without the assistance of a home loan. Lenders therefore receive a ton of home loan applications from prospective homebuyers every year. But up to 40% of all home loan applications are turned down, because there is some kind of problem with many buyers' credit history and personal finances.
In South Africa, as in most other places in the world, lenders make use of credit scoring to speed up the process of assessing new home loan applications. Credit scoring is also called "risk scoring", and is a quick and inexpensive way for lenders to determine how big a risk they would be taking if they lend you a whole lot of money to buy a property.
It makes sense that a lender would be eager to lend money to someone who has a reputation of dutifully repaying their debts, no matter what, rather than to lend money to someone who has a history of paying their debts late, or not repaying debts at all. So, although we all agree that one should never judge a book by its cover, it makes perfect sense that lenders should judge a home loan application by the debtor's credit history.
What is credit scoring?
If you have applied for a home loan, or some other form of credit, chances are good that you may have had your credit information graded, in order to determine your credit risk potential. Credit scoring is a very important factor in the credit application, or home loan application process. Credit scoring influences a lender's decision to grant you a home loan, or any other form of credit, or not. According to research, the better a borrower's credit score, the more likely it is that the borrower is willing and able to repay a loan.
Your credit score is a grade, in the form of a number, which sums up your credit history at a particular point in time. Your credit score takes a whole lot of different factors about your credit history into account. Lenders use credit scoring to speed up the loan review process and to reduce the cost of examining your credit information. Credit scoring also gives credit grantors an unbiased method of evaluating your credit history.
In South Africa, there is no standard method of calculation for credit scoring. So, as a consumer, you cannot see your credit score for yourself, because there are in fact many different credit scores. Which credit score gets used, depends on the preference of the lender you are dealing with. This makes it hard to know if you have a good credit score or not.
South Africa has two main credit bureaus, namely Experian and TransUnion ITC. These credit bureaus have developed the most widely used credit scoring methods in South Africa. Experian use the Delphi credit score, and TransUnion ITC has developed the Empirica credit score. Both of these credit scores use data from your credit report to determine your credit score. Both Experian and TransUnion ITC are experts in the field of credit scoring. A large part of the credit bureaus' business consists of providing credit scoring solutions to various lenders in South Africa.
How does credit scoring work?
Credit scoring is not as simple as 2+2. Your credit score will take into account a whole lot of information, such as the number of accounts in collection, defaults, and late payments. But the credit score also reflects how frequently and recently these things occur in your credit report.
The impact each item has on your credit score depends on the other information in your credit record. For instance, one late payment may not affect your credit score too negatively, if the rest of your credit history is good. But a recent late payment may indicate the start of a problem for someone with a history of bad credit, and will have a bigger influence on the credit score.
A bad credit report, somewhere in your credit history, does not mean that you are forever doomed to a life without credit, though. You can redeem yourself, and your credit score, by getting into the habit of making consistent, on-time repayments. You will receive credit score points for maintaining a good payment history.
The most recent data in your credit report weighs more heavily, as far as your credit score is concerned, than things that happened a long time ago.
Outstanding debt and credit scoring
Your credit score will take into account how many credit accounts you have, the average balances of those accounts, your current level of borrowing, and whether you are reaching your credit limits. If you are already in a hole, where your debt load is concerned, lenders will be less willing to grant you even more credit.
Having too much credit available, through existing accounts with low outstanding balances, can also count against you, even if you are not making use of those credit facilities.
Your credit history and your credit score
Credit scoring takes the age of your credit accounts into consideration. The number of new credit accounts in your credit profile may negatively affect your credit score.
The number of credit enquiries reflected on your credit report is also taken into account, along with the amount of time that has passed since the last credit enquiry into your credit report. Lenders make enquiries into your credit record when you make an application for credit. And a number of recent enquiries may indicate to a lender that you are expecting some financial problems.
Research has shown that people who are expecting to run into financial problems often open up as many lines of credit as possible, while their credit history is still good, to make as much cash available as possible, for those hard times. Now, if I was heading for hard times, my reasoning would be much the same, but what happens to those debts if the "hard times" last longer than expected? The lenders would clearly have problems getting repayments out of me.
Credit type and credit scoring
Your credit score will also look at the diversity of credit types you make use of. Whether you use credit cards, department store cards, short-term loan-shark-type loans, access bonds or instalment loans will affect your credit score.
Negative credit reports and your credit score
Negative credit reports in your credit history will have a definite impact on your credit score. Negative credit information includes creditor judgments, repayment defaults, collections, insolvencies, rehabilitations, administration orders and notices.
Negative credit history listings have a huge negative impact on credit scoring in South Africa. It would be wise to negotiate with the affected debtors to have as many of such negative reports removed from your credit history as possible, before applying for a home loan.
Make use of a specialist attorney's assistance when negotiating the rescission of judgments and the removal of default data from your credit history. Removing all possible negative credit reports from your credit history before applying for a home loan will greatly improve your home loan credit score, and your chances of having a successful home loan application.
Home Loan Credit Scoring
The best method to obtain a good credit score, when you apply for a home loan, is to always responsibly maintain your credit accounts. Repairing the damage to your credit history, after defaulting on a debt, is much harder than simply sticking to your word and repaying your debts as agreed with your creditors.
