A recent survey by TransUnion (NYSE: TRU) showed that over half (57%) of South African consumers surveyed are taking a more active role in learning about credit as a result of the current economic climate.
According to Garnet Jensen, senior director for TransUnion, this heightened interest could possibly be contributing to the small improvement seen in the overall health of the country’s Consumer Credit Index (CCI), reported by TransUnion for the second quarter of 2017. “Despite this, the index continues to remain under pressure, and there’s little doubt this will continue to prompt South African consumers to take a more active role in improving and maintaining their credit health. One simple way to do that is by regularly checking your credit report, which is used by credit providers as one of the mechanisms to determine a consumer’s credit worthiness,” says Jensen.
However, despite consumers’ renewed commitment to manage their debts and the Q2 CCI showing a marginal credit health improvement, many households remain highly indebted in a challenging economy. Against this backdrop, only 37% of consumers report they actually know their current credit score.
“Realizing the aforementioned landscape, there are clear indications that we have a long way to go before there is a proper, widespread understanding of credit,” Jensen said. “The mere fact that so few respondents know their credit score is significant, because knowing your own credit score is the first step to understanding credit overall.”
The TransUnion survey also shows that only one-third (33%) of adults are at least moderately familiar with what is included in a credit report. Even amongst those who are taking a more active role in learning about credit due to the economic climate, the proportion barely rises to 43%.
“All of this data points to a persistent lack of understanding about credit, even amongst those who are trying to learn more,” Jensen notes.
To advance consumer education, TransUnion offers answers to the top five most common questions and misperceptions about credit, including what appears on your credit report and what affects your credit score.
Myth #1: Using a debit card instead of a credit card will improve your credit score.
Over half of respondents (56%) believe that their credit score will increase if a debit rather than credit card is used. But the truth is that while a debit card may be useful in controlling spending, it does not demonstrate an ability to manage credit and so it does not count towards an individual’s credit score.
Myth #2: Closing credit accounts in your name will positively impact your credit score.
Nearly three out of five respondents (58%) said that closing credit accounts will positively impact their credit scores. However, the impact of closing credit accounts, including credit cards, depends on individual circumstances. In some instances, it may have little or no effect, but when the account represents a long credit history or a large portion of available credit, closing the account may have a negative impact.
Myth #3: Children or other dependents affect an individual’s credit score.
Overall, 20% of respondents say that having children has a negative effect on their credit score. In fact, while the number of dependents is noted on credit reports, this information does not affect the credit score, which is based only on the individual’s financial habits and history.
Myth #4: Bank account balances are reflected on credit reports.
Two out of five respondents (41%) said the amount of money in bank accounts is included in a credit report. While monitoring one’s bank account is an important part of managing one’s finances, including one’s credit obligations, a bank balance does not contribute directly to a credit score, nor does it feature in a credit report. Adding to this, a surprising 65% of respondents said they believe that building more savings would improve their credit score. In reality, however, no bank balances, including savings accounts, are used in calculating a credit score, nor do account balances appear on credit reports.
Myth #5: Income level is reflected in a credit score.
More than three quarters (77%) of respondents believed changes in salary would positively impact their credit score. While salary data is not reflected in an individual’s credit report or score, credit providers will request this information in order to evaluate affordability, before issuing a loan. Regardless of a person’s salary level, it is important to use credit responsibly and pay bills on time and in full each month.
“We hope that debunking these myths will help consumers gain a better understanding of how credit scoring and reporting actually works, and thus empowers them to manage their financial affairs better,” concludes Jensen. “In these tough economic times, managing credit responsibly is most important, and can affect an individual’s financial standing for years to come.”