Picture: ISTOCK
Picture: ISTOCK

For many people, the role and importance of credit bureaus and credit reports begins and ends when they suddenly find their credit card application rejected - and discover it was because of feedback from the credit bureau.

But what is a credit bureau and what can it teach you about managing your credit?

A credit bureau is a company that gathers and organises individuals' credit transactions. Credit bureaus distribute this information to banks, creditors and clients in the form of a credit report, for a fee.

Within the credit report you get a credit score. Your credit score shows how well you're managing your finances. For example, TransUnion, a credit bureau company, rates as "excellent" a credit score between 918 and 999. "Poor" is 615 and below.

What sort of information is collected to generate your credit score? Credit bureaus collect information relating to your payment habits: if you've missed payments, if your account is in arrears or if you have any judgments against your name.

Your credit report will also show how many times you've applied for credit in the past two years. This is important because making too many credit applications can have a negative impact on your score.

The information is passed on to lenders and creditors on a monthly basis.

However, getting and maintaining a good or excellent score isn't a magical process. It means understanding the role credit plays as an enabler - and preventing yourself from drowning in debt, which could affect your credit score and mess up your financial life.

What is the difference between credit and debt?

Simply put, credit is what is offered to you by a credit provider. To have credit doesn't mean you're in debt. However, the moment the credit extended to you is put to use, it becomes debt.

To illustrate: if you apply for a credit card and it's approved for the value of R30000, then you have a credit facility. That facility will only become debt when you use it. The secret to ensuring that the credit you have access to doesn't become a debt burden is to ensure that you don't spend all the credit available to you when you know you can't pay it all off.

Keeping your credit usage below the limit will count in your favour. In the same breath, maxing out your credit facility, then paying only the minimum amount owing, will have a negative impact.

The second part of taking care of your credit is monitoring it. One part of that is ensuring that you make payments on time. Missing payments has an adverse effect on your credit score.

You also want to check your credit report regularly to ensure that your credit habits are reflected in your score.

You may wonder why this wouldn't be the case if you're diligent about paying your accounts on time. Well, there's something called identity theft and it happens more often that you'd like to believe.

Having an "It won't happen to me" attitude isn't the best approach here. To be safe rather than sorry, you should check your credit report at least twice a year.

You're entitled to one free credit report, which will give you a basic idea of where you stand.

If you find that your report doesn't reflect what you believe your financial behaviour to be, you should purchase a full report that gives you a proper breakdown of your credit score and the factors that affect it.

If you see transactions for accounts that you don't have, you can lodge a dispute with the credit bureau that issued you with the report.

Tsamela is the founder of piggiebanker.com. You can follow her on Twitter @DineoTsamela

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