HOW ARE CREDIT SCORES CALCULATED?

Speaker 1: [00:00] Welcome to the official podcast from mycreditstatus.co.za. We will be introducing you to credit experts who will be providing valuable insight and advice from your financial health to improving your credit status and score. Your host for the show is Laura Palmieri.

Laura: [00:20] Hi, and welcome to My Credit Status podcast. I'm Laura and with me today is Premlin Pillay from XDS. Let's quickly explain XDS is the largest locally owned Credit Information Bureau in South Africa. They deliver user friendly and affordable information solutions and technologies that are using all aspects of credit provisioning. Today we're going to talk about the financial impact of the Coronavirus on your credit score. Premlin, welcome to the show.

Premlin: [00:50] Thank you, Laura. Great to be here.

Laura: [00:52] Fantastic. Let's start off with the basics. In layman's terms, how is a credit score calculated?

Premlin: [01:01] Laura, under the National Credit Act or the NCA all credit providers are obligated to provide us a payment profile to the bureaus and a payment profile is simply how a customer conducts their credit record. We use this data contained in this statement profile to calculate a credit score based on a statistical model that we use.

Laura: [01:30] Okay, am I right to assume when you mention payment profile is it how they pay off their debts?

Premlin: [01:37] You've undertaken a contractual obligation with your credit provider and in that contractual obligation you would have to pay a certain amount of money and it's how you've actually paid that amount of money. Has it been on time? Is it late, is it in arrears and that's the type of payment profile data that we get across.

Laura: [02:04] Okay, that makes a lot of sense. Now, what kind of information do credit bureaus like XDS collect. Can international companies list negative info with you about a consumer?

Premlin: [02:19] So let's start with the type of data we collect. We get as we mentioned, the payment profile from the credit providers and this profile, as we mentioned would contain information about how a customer conducts his or her account over time. The number of accounts , the type of accounts, the behavior on the account like missed payments, arrears and so forth, and that's generally the main source of our information. We would also get information like judgements, has someone taken out a judgment against a consumer. So in general, and in our experience international companies cannot list negative information with XDS about a consumer. Who can list negative information about a consumer is anyone who a consumer has entered into a credit contract with.

Laura: [03:17] Okay, yes I understand that. So it's only local obviously because you've entered into a contract in South Africa.

Premlin: [03:25] Yes, indeed.

Laura: [03:25] Okay. Now does all your consumer information come from SACRRA or independent creditors as well?

Premlin: [03:34] Now in the main our consumer information comes only through SACRRA.

Laura: [03:42] Okay, only through SACRRA. Now, I'll explain to our listeners , SACRRA is the South African Credit and Risk Reporting Association and they are not for profit voluntary association of members who share credit and risk performance data of their customers. Now legally, do you as a bureau own the consumer information or a creditor? So basically does a bureau own it or does the creditor own that information?

Premlin: [04:09] Depending on the data, Laura. I would say that the data from a payment profile is owned by the credit provider as well as the consumer and the reason I say that is because as consumers we own our own data, our address, our ID number and so forth. The credit provider would own the data that they collect the arrears and your payment behaviour and so forth. The bureau does not own the data. We're merely custodians of the data. We can collect it, we can store it, we can use it, but we cannot change it nor do we own it. We are merely custodians of it.

Laura: [04:54] Okay, that's a very good clarification. I think a lot of consumers aren't aware of that . They have a sense that it's almost like a big daddy that owns all their information, but I think you've clarified it quite clearly now what it's all about. Now how many disputes do get corrected and can you explain the process that happens behind the scenes when a user disputes information with XDS?

Premlin: [05:19] Sure, so let's start with the second part of the question. So a consumer will note a discrepancy either through a credit application process or through looking at their free credit report and possibly just as a side note, consumers should really take advantage of reviewing their free credit reports either through our information portal, Splendi, or by requesting one because then you'll be able to see what the credit information is and whether it's valid. But once they note a dependency they can log a dispute and they either log a dispute through an online portal like our XDS online portals, Splendi, or at our call center to log a dispute. Through that process they will be encouraged to provide as much detail as possible on what the discrepancy is. Why do they think it's not correct and so forth, and then XDS will take it from there.

[06:21] We will then engage with the credit provider and we will log that issue with the credit provider and the credit provider is then obligated to investigate and thereafter provide a response. This response may be in the consumer's favour or not. If it's in the consumer's favour, yes there was an error and the credit provider fixes the issue, they will resubmit the data to us and we will update it on our side. In terms of the quantity we get approximately two to three thousand disputes every quarter so every three months and the statistics indicate that about 69% of these two to three thousand disputes that are logged are resolved in favour of the consumer.

Laura: [07:13] Wow, that's a high percentage actually. Are you there?

Premlin: [07:21] Yes.

Laura: [07:22] That's actually quite a high percentage, but this is very interesting to me because I think as the custodians that you or should we say middlemen, you have to deal with the consumer coming to you for a dispute. You then have to go back to the credit provider and make sure that dispute’s corrected. Then they must come back to you, only then can you go back to the consumer. Is that correct?

Premlin: [07:41] That's correct, yes.

Laura: [07:42] Okay, so basically how long does it take to finalise if there is an error or a dispute should I say?

Premlin: [07:51] Yes, so legally we have to get back to the consumer within twenty days.

Laura: [07:57] Twenty days and from your experiences does that usually happen?

Premlin: [08:03] Yes, we are quite good and our credit providers who are SACRRA members are aware of that obligation so in the main we do hit that service level agreement with our consumers.

Laura: [08:21] Okay, that's fantastic and how often do you notice incorrect information on your database and how does this happen?

Premlin: [08:29] Yes, so I think data comes from the credit provider and then they submit it in a very specific format through to SACRRA who then distributes the data to all the bureaus. So there is a centralised process with SACRRA for credit providers to pass the data through with quite a strict level of data quality standards and that data quality is monitored at a SACRRA level. XDS has also got a dedicated data quality team, who in addition to SACRRA's quality process, we also profile the data on a regular basis and try and correct data proactively and monitor that data quality.

[09:16] So how do these data issues happen? So it could be inadvertently when a consumer or the credit provider is completing a credit application. Dates of birth or identification numbers are transcribed incorrectly and that would go through the process and get picked up to the data quality process. There would also be instances of fraud where someone has used an ID to open up an account and the consumer will say, that's not mine and we would then go and investigate, but it's a combination of normal human error as well as some fraudulent behaviour.

Laura: [10:02] Okay, alright and then based on your stats what percentage of South Africans have negative info on their records?

Premlin: [10:10] So I would take negative info in a certain perspective and for us negative as in a customer has got arrears on their accounts so they haven't paid up to date, and just from our data we see approximately 40% of customers and 26% of their accounts are in arrears. This means that they either one month in arrears, two months or three months in arrears.

Laura: [10:42] Okay, alright and then as South Africans are battling with the impact of COVID-19 on the economy, many consumers have been left with the inability to earn an income or receiving less income due to the reduced working hours. What impact will this have on their credit scores?

Premlin: [11:01] Yes, so the Coronavirus is a novel virus, so it's new and as with the virus it's very much a new situation for us and it's introduced levels of volatility in the economy that is much different from what we've seen in the past. So ultimately if a consumer continues to make payments toward their credit obligations, it should not have an impact on their scores. If they do miss payments, the credit provider would note that missed payment, it would come through to us and we would update our models and that may likely impact their credit scores negatively.

Laura: [11:50] So currently, if I understand it correctly there's no kind of a leeway with regards to this negative information being listed if the consumer is late due to the ability they're not receiving an income. There's no like the banks are offering payment relief and that. Nothing like that is currently happening with the bureaus.

Premlin: [12:11] So we are a receiver of information, so we wouldn't know what would happen on the other side of the transaction, but for us to say as long as the customer is paying and meeting their obligations that they've agreed with the credit provider, whether that is a debt restructure or payment holiday that they've agreed with a credit provider, like a bank or so forth, and the credit provider notes it as such and says, look we've entered into a restructure agreement. The consumer is now meeting their obligations on that restructure agreement and that data passes through to us then it should not impact their score, but we are dependent on the credit provider providing us with that data.

Laura: [13:02] That's correct yes, you're right. Now, South Africa's major banks, actually we touched on this briefly now, have introduced various measures to assist consumers impacted by the COVID-19 disaster. Most of this assistance comes in the form of a debt repayment holiday or all kinds of loans. Does this have an impact on a person's credit score. I think we just touched on that now as well now.

Premlin: [13:25] Yes, so it's the same.

Laura: [13:29] Yes, it all goes back to the credit provider that comes back with what they're actually listing.

Premlin: [13:34] Yeah, indeed.

Laura: [13:36] Okay. Now, what advice would you give on how consumers can handle their credit score during this pandemic to minimise the impact on their credit scores?

Premlin: [13:47] I think consumers, it is tough out there and with the lockdown period I think there is going to be significant stress on the consumer. So I think the first port of call for a consumer if they under stress is make sure they're talking to their credit provider and making arrangements if you're under financial stress. I would assume that with the knowledge of the impact of COVID and the government and the private sectors interventions on this, that there is a degree of sympathy around the financial stress that consumers are under. So I would say that the consumer must be talking to the credit provider. Being transparent around the level of stress they're under and making arrangements with their payments.

[14:47] The second thing for me is make sure you're logging into either our credit portal, online Splendi, or to get your free credit report and keep on checking your details and know and understand your score. Through Splendi you can access your credit report as many times as you like, so understand your credit score, understand the amount of stress you're under, financial stress that is, and as quickly as possible engage with your credit provider and have discussions with them around making arrangements around your payments.

Laura: [15:24] Okay, yes that actually makes sense. Yes, the consumers actually need to take control now and even though we're going through this pandemic they must still manage their credit and like you say, have an open conversation with their creditors to try and avoid getting listed or making a debt repayment plan is the best option actually.

Premlin: [15:47] Yes, indeed I agree.

Laura: [15:50] Okay, Premlin, thank you so much for taking part in our podcast. We really do appreciate your valuable input and I know for sure that we definitely will be getting you back on the show.

Premlin: [16:02] Thank you very much. It's been a pleasure being here.

Laura: [16:04] Thanks a lot. Have a good day.

Premlin: [16:06] You too, goodbye.

Speaker 1: [16:07] Thank you for listening to My Credit Status podcast. Make sure you tune into our next show where we will continue to provide you with valuable information about your credit health. We value your feedback, so we would love it if you can rate and review us on iTunes. Don't forget to subscribe to this podcast so that you can be alerted as soon as a new episode is live. Visit mycreditstatus.co.za