Oran Hall | Understanding your credit score

A credit score is a number derived from mathematically analysing the past credit behaviour of an individual and is used in determining the individual’s suitability for receiving credit.

It represents the assessed risk of individuals on a numeric scale such that the higher the score, the lower the risk of the individual dishonouring a financial or other obligation.

Within each risk grade, there is a range of scores. Using the scale of EveryData Jamaica Ltd, a credit bureau operating in Jamaica, the risk grades are as follows: very low risk, low risk, average risk, high risk, and very high risk. For each level of risk, there are three levels, each associated with a range of scores.

At the top, the very low risk category, the levels are A1, A2, and A3, their associated scores being, respectively, 740-900, 725-739, and 710-724. At the other extreme, the very high-risk category, the risk levels are E1, E2, and E3, the associated scores being respectively 380-529, 271-379, and 250-270.

Credit scores are derived from your payment history, outstanding balances, length of credit history, applications for new credit accounts – mortgages, car loans, and credit cards, for example.

Every financial decision you make can affect your credit score and your ability to get, not just credit, but a job, basic utilities, services, and rental accommodation, for example.

Good financial choices help lenders and businesses see you as low-risk, and you will be more likely to receive financial opportunities including higher credit limits and lower interest rates, and you may be less likely to need collateral and a guarantor when applying for loans. At the same time, lenders use their own criteria to decide whom to lend to and at what rates, but a higher credit score can generally help you qualify for a loan or credit card with a lower rate or better terms.

Credit bureaus are the entities which collect the data required to make up your credit report – a detailed record of your past credit facilities and transactions, as well as other relevant information – and compute your credit score.

The Credit Reporting Act 2010 provides for a credit bureau to receive the following credit information on consumers from prescribed credit-information providers: the amount and nature of loans or advances or other credit facilities; the nature of security taken in respect of credit facilities, including lease financing and hire-purchase arrangements; information as to financial means, credit worthiness, or history of financial transactions, including antecedents, and adverse court judgements; and the nature of any guarantee or other non-fund-based facility, and analysis of the above, including any conclusions as to credit worthiness.

It includes the following as credit-information providers: commercial banks, near banks, building societies, securities dealers, Development Bank of Jamaica, insurance companies, National Housing Trust, and people in the business of selling goods under hire-purchase arrangements, credit bureaus, people who publish information on suits and judgements for debt claims, and entities exempt from the Money Lending Act.

Credit scores change. They may get better or worse depending on how your circumstances and financial behaviour change.

Considering the value of a credit score, it is important to build a credit history.

Start early – the length of your credit history is key in determining your score. Start small – applying for much credit in a short period of time could suggest you do not plan to live within your means.

To start building a credit history, open a credit card account, and pay in full and on time. Where possible, ask a family member to allow you to be added to their credit card account. Do not abuse the privilege.

It is important to maintain or improve your credit score by taking steps such as the following:

Limit your accounts as too many may make it difficult to service them effectively. Avoid closing old accounts to help maintain a long credit history, use your accounts and pay in full and on time, and maintain a low balance to credit limit ratio, that is, do not use your credit limit to the maximum. And make a written request for the free annual credit report to which you are entitled, look out for errors, and report any that you identify.

In case you need to rebuild your score, there are steps you can take. Here are some examples in addition to those above: contact all creditors to set up payment plans, where possible; pay off delinquent accounts first, then debts with higher interest rates; explore opportunities for debt consolidation or to transfer balances to a lower-rate credit card, where possible; set up reminders to help you pay bills on time; be careful in closing accounts as closing older accounts may shorten your credit history and affect your score negatively; and plan for major purchases.

Last, but not least, create a serious and realistic budget taking into account your true financial situation.

Nothing is wrong with incurring debt, but it should not be used routinely to fund a life style you cannot afford and cause you to earn a low credit score, which could seriously harm your ability to have access to credit to acquire valuable long-term and life-changing assets.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com