Welcome back! In our Knowing Credit part 2/6, we discussed ...
Welcome back! In our Knowing Credit part 2/6, we discussed five criteria that a credit provider considers during your credit application.
Definition of the week: CREDITWORTHINESS
Your creditworthiness is a measure of the possibility that you may fail to pay back your loan (default). This default risk is based on your credit history, your credit score, and also factors like whether you own assets or have existing debt.
In today’s lesson, we will look at how a credit provider will review your credit application.
First, you apply for credit at a credit provider. You have to provide documentation, such as proof of employment and income, and records of other debts and assets.
Next, the credit provider looks at the six criteria mentioned above to determine whether you are able to take up credit or not.
After considering these factors, the credit provider will apply their own rules and policies, known as internal assessment standards. These vary from provider to provider. For example, some credit providers may require that a deposit must be made on a home loan.
Finally, the credit provider will reach a decision, and your application for credit will either be approved or declined.
If your application is approved, you may take up the credit. It is understood that you will manage it responsibly, i.e. make your monthly payments in full and on time. Refresh your memory from our lesson on rights and responsibilities. Your responsibility as a consumer is to ensure you make your payments on time.
If your application is declined, you have the right to ask the credit provider for a reason why your application was not successful. After this, you can take the next step. This may mean having to live without the credit, or shopping around with other credit providers.
Helpful Hint: People sometimes get confused between the terms ‘affordability’ (can you afford to pay off the loan) and ‘creditworthiness’ (are you responsible enough to pay back the money). These are the two primary factors that a credit provider will use to decide whether to approve your credit application.
You can get a good idea of your creditworthiness by logging into www.mycreditcheck.co.za and viewing your full report. The lower your score, the lower your creditworthiness would be – especially if you have any overdue or late payments. Here are the score bands you will see on My Credit Check:
Come back next week to learn about gross versus net income, and to see an example of an affordability calculation.