Home loan applications are scored electronically before being assessed by an individual. Points are allocated based on the information provided and the applicant's credit record. Should the banks' electronic system decline an application, it requires a very strong, well-supported motivation for a credit manager to override this decision. So how do you ensure that you obtain a good score and are first in line when it comes to credit extension?
1) Reduce unnecessary facilities
All credit limits granted, whether used or not, are taken into account when evaluating your affordability. Hence, if you have an overdraft facility that you are not utilising or a credit card limit of R60,000, where you only need R10,000, reduce this accordingly.
2) Have some form of credit facility
It is very difficult for banks to assess your credit management if you don’t already have an existing credit facility. Having no credit facilities will reduce your credit scoring.
3) Pay your accounts on time, every time
If your account is due on the 30th of the month, but you are in the habit of only paying a few days later, your account will reflect, in your credit report, as being 30 days overdue. If one month you pay a double instalment and the next month you don’t pay your account, you will be an instalment in arrears. To avoid having arrears reflecting in your credit record, pay your accounts by debit order.
4) Avoid bounced cheques/debit orders
If your cheques or debit orders are returned due to insufficient funds, your credit scoring at that particular bank will be adversely affected, even if you sort out the problem the very next day. When applying for credit at another financial institution, they will request three to six months bank statements and possibly even a “code” from your banker. If at the time your unpaid items are still evident, they bank may refuse to grant you credit.
5) Check your credit record
Contact the various credit bureaus and make sure that you have not been inadvertently listed. You are entitled to a free report once a year. Immediately dispute any adverse record you don’t agree with or sort out any outstanding listing. This information is available to all banks and they will not grant any form of credit extension if you currently have unresolved debt issues. TransUnion ITC - 086 188 6466 Experian S.A. - 086 110 5665 Credit Information Ombuds - 0861OMBUDS (0861 662 837)
6) Be proactive
If you suspect that you will be entering difficult times in future, make plans to release equity on your assets, obtain additional finance and reduce existing expenditure. Make hay while the sun shines, because once you are in trouble, it will be very difficult to convince anybody that you are worthy of credit.
7) Have updated financials
I’m always very surprised at how many self-employed entrepreneurs don’t have updated financial statements and management accounts. How do you manage your business? Without management accounts, you are sending out a clear message that you are not on top of the financial aspects of your business. How do you propose convincing anybody that your business can continue sustaining itself and provide you with future income? Financial statements and management accounts are the foundation for successful business management. They reflect the history of your business, your income and expenditure and the flow of funds, and without them it is almost impossible to assess your creditworthiness.
8) Avoid trading in cash
If you run a cash business, deposit your cash into your bank account. Even if you have accurate financials, but the bank is unable to verify your turnover through your bank account, they may refuse to grant you credit.
9) Physically pay yourself
This is for the self-employed. The banks need to confirm that income declarations are evident, on a month-to-month basis, in the applicant’s personal bank account. Gone are the days that personal and business transactions conducted through the same account, supported by an accountant’s income declaration, would suffice.
10) Does your bank offer credit facilities?
Make sure that the bank that you bank with offers credit facilities such as overdrafts, personal loans, business facilities, home loans, etc. When available cash for lending is limited, as with the current economic climate, the banks reserve the privilege of a loan, discounted rates and to override the system declines, for their own clients. Should you not bank with a bank that offers these facilities, obtaining credit may be challenging.
One is always eager to blame circumstances and the current market conditions for the position we find ourselves in. Without sounding insensitive, 80% of all declines are due to applicants not taking responsibility for their creditworthiness. Obtaining a home loan is within everybody’s reach, provided you remain worthy of credit.