South Africans are rightly concerned about their finances right now, but it’s vital that you don’t cancel your insurance or default on your insurance premiums, cautions Wynand van Vuuren of King Price.
This will not only put you in a difficult financial situation if something valuable is damaged or stolen, it’ll also affect your ability to get insurance, or any form of credit, in the future, as your credit score will be impaired, he said.
Don’t just stop paying. Bad credit decisions can come back to haunt you later. But, there are several things you can do to make sure you pay the lowest premium possible, especially during lockdown.
“Talk to your insurer now and make a plan in the short term, rather than suffering long term consequences,” said Van Vuuren, who is a partner of customer experience at the insurer.
Defaulting on your insurance premiums will see you being reported to the credit bureau for non-payment, which will negatively affect your credit score.
A credit score is a 3-digit number that helps lenders evaluate how safe or risky you are as a customer.
It’s based on the information contained in your credit report, which is a history of all the loans and credit you’ve ever taken, and how you’ve paid them back, as well as how reliable you are with your other monthly payments.
So why does your credit score affect your insurance premium?
King Price noted that insurance companies use a range of factors to assess your risk and determine the premium you will pay.
For a car, these include the security measures where you park your car; the age, make and model of the car; your age and driving history; your accident and claims history – and your credit score.
“You may not realise it, but your credit score is a powerful predictor of your financial behaviour. It shows lenders and financial institutions how likely you are to pay your bills and default on debts,” said Van Vuuren.
“As such, when it’s combined with other factors, it tells an insurer how risky you would be to take on as a client, and this risk will be reflected in your premium.”
According to insights and data company TransUnion, the biggest influence on your credit score is your account payment history – that is, how you manage your accounts and whether you make the monthly payments on time.
To improve your credit score, focus on paying the full instalment of every bill on time, so you’re offsetting past negatives with more recent positives.
It also helps to maintain a healthy mix of credit – store accounts, credit cards, a home loan, and service contracts such as cell phone accounts – to establish a good credit history.
The bad news is that a negative credit score can take two years to fix, King Price said.
Many pay little attention to their credit score until it’s too late
South Africans are able to access one free credit report every year from the four consumer credit bureaus, noted Kriben Reddy, vice president of TransUnion Africa’s consumer division. He said that just 9% of the 25 million credit-active South Africans, actually access their credit report annually.
Regularly checking one’s credit report and credit score should be part of every South African’s personal financial habits.
“This will inform a person of their credit status, their personal payment history and, of course, the ability to acquire credit when it is needed,” said George Roussos, chief operations officer at African Bank.
He said essentially a credit report is a record of your credit history and payment behaviour and reflects a six – 24-month view on how you pay your accounts. Credit bureaus then calculate your credit score from this as a three digit number to explain your credit behaviour. “Generally, the higher your score, the better,” said Roussos.
With South Africans facing increasing financial hardship, this is a good time to consider your credit worthiness. The lockdown has impacted many South Africans’ earnings – and that can make it tempting to default on payments or to apply for more credit to tide you over.
“But these and other actions may negatively affect your credit score going forward. And that’s important, because you may reach a stage where you have to apply for, say, a loan to fund yours or your child’s education. If you haven’t checked on your credit score first, your application may well be rejected,” said Roussos.
He said one cannot under estimate the value of a good credit score. “It’s your ticket to better interest rates on a loan and being able to plan ahead knowing that you will qualify for some form of credit.”
According to weekly research being conducted by TransUnion, week 2 results (week of 13 April) show that when compared to a week ago, more South Africans are being negatively impacted financially (81% vs 79% last week). On average respondents said they will be short about R7,000 in the near future and expect to run into a shortfall between two to four weeks from now. 88% are concerned about their ability to pay bills and loans.
And yet, said Roussos, “finding a way to service these bills is essential if consumers are to maintain a high credit score.” Roussos says it is a vital piece of information if potential lenders consider before they decide whether or not they will give you credit.