understanding credit rating

All of your credit rating questions answered

30 Aug, 2017

If the mention of a credit check instils a fear of dread in you, you’re not alone. For some reason, many people spend a lot more time worrying about their credit rating than is really necessary.

Ok, if you’ve had some financial trouble in the past you may find it comes back to bite you, but there’s a lot more to a credit check than looking at your previous repayment habits.

Once you understand what a lender looks at when they check your credit rating – and how this then informs their decision – you might be able to put your mind at rest a little.

You can see why lenders want to be cautious and fully assess your situation before loaning any money to you. They have shareholders and depositors to answer to, so a certain level of risk management is necessary.

 

What do they check your credit rating?

When a potential lender is considering offering a loan, they will gather answers to several questions including:

How long have you been at your present address and job?

They’re looking for stability; if you have just moved or started a new job they will probably ask about your previous address/employer

How much income do you have?

Naturally, they need to make sure you have enough to meet the loan repayments

What kind of work do you do?

If it’s any kind of seasonal or unreliable employment, such as crop farming or commission-based selling, this could raise a warning flag.

What is your marital status?

A steady relationship is proven to make you a better payer

What is the value of your assets?

If you’ve managed to accumulate considerable assets it’s a sign that you’re less of a credit risk

How have you repaid previous loans?

A leopard cannot change his spots, so they say. A poor repayment history will count against you here

The lender will then analyse this information to decide whether you’re a safe enough bet. They will pay close attention to your credit history, and will contact your previous or current lenders to find out what kind of borrower you are.

 

Your credit history matters

What they really want to hear is that you always make your repayments on time without needing a reminder. If they get reports that you have missed repayments or always wait until the final notice is sent, they may be more wary about lending to you – you sound pretty high-maintenance.

As part of the credit check your lender will contact the credit bureau to find out what is on their files. Before a lender can access any of your personal information, they must first confirm their lender’s code and your name, sex, date of birth, driver’s licence number, occupation and last two addresses. This helps prove that they are authorised to carry out the check.

The credit bureau will ask what the application is for, and this will be recorded on your file. Then they will hand over all the information they have on you, including previous credit applications and delinquencies.

A delinquency on your file shows there has been some kind of problem in the past. These can include judgement, repossession, bankruptcy or the borrower ‘skipping’ – essentially running away from their debt by moving house and not providing a new address.

You’ll see that any applications for credit – whether eventually approved or not – are noted on your file. This means you should be careful about getting too many credit checks in a short period of time because they’ll all be recorded against you name and may affect your credit rating.

Once the lender you’re applying to has gathered all this information they should be ready to make a decision… good luck!

 

To sum up:

  • Your credit ratings needn’t be a mystery – it’s not too hard to understand what lending organisations want to check and why
  • The main point of a credit check is to assess your current financial situation and previous loan and repayment history
  • Elements of stability in your life, for example with your address, job and relationship, will generally be considered a plus
  • The lender will contact the credit bureau and your previous lenders to get an idea of your credit history and repayment records
  • All applications, regardless of the outcome, are recorded on your file along with any delinquencies
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