A good credit rating can save you money

The credit rating system made its appearance in Israel in 2019 without too much fanfare – although I did contribute a trumpet or two with my article at that time https://labinsky.com/your-new-personal-credit-rating/ . However, I want to revisit the topic now in light of the higher interest rates we are currently paying. It’s important to be aware that an excellent credit rating can help significantly to lower interest rates offered on loans. Credit is an important part of our economy both on a personal and business level, and interest rates savings can be a critical part of your long-term financial success.

Brief background

The credit rating system encourages competition among credit institutions and instills good financial habits among us all. Before it was introduced, our personal bank was the institution with the most credit information about us and, in most circumstances, they were able to offer us the best rates. However, people with weaker credit records needed to shop around and pay higher prices with other institutions. Now that our credit history has become available, other companies know what kind of credit risk we are and can now offer terms (either preferential or unattractive) depending on our rating. Improving our rating thus becomes crucial to our ability to receive better terms of credit.

How to check your credit rating

The main way to access your credit information is through the government’s credit depository at www.creditdata.org.il or by calling *6194.  Every year you can order a free summary report of all your credit history over the last 3 years or 10 years.   This in-depth report has lots of information that you will need to sift through to see if there is anything worrying that you need to correct.  The report is very detailed and technical so it might not be useful to everyone.

An alternative method is to check your credit score via Dun & Bradstreet. Their credit department has created an app called Captain Credit which links to the Bank of Israel’s information base, to enable people to see their credit rating, based on a number system within the app. You need to download the app, register and then you can check your rating.

Factors that adversely affect your credit rating include:

  • Going above your agreed credit framework (including your overdraft).
  • Checks that bounce.
  • Horaat keva (direct debit) payments that are rejected.
  • Problematic loans.

Take note that everyone is assessed individually. Even if the loan is taken out by a couple, each person has their own individual rating.

How to increase your credit rating

The amount of your wealth is irrelevant. Someone with a large amount of assets but bad financial habits will have a lower rating than a person with less money who never defaults on a repayment. To increase your rating make sure that you:

  • Repay all payments for all debts on time.
  • Try and reduce the amount of loans you have.
  • Avoid using your entire credit facility (mizgeret ashrei) at your bank. If you are using the entire amount, try to get it increased so you aren’t using it all.
  • Make sure that your loans reflect the timeline of the expenditure. Taking a long-term loan for a home purchase is fine, but far less desirable for buying a car or financing a simcha.
  • If you know that you won’t be able to meet a payment, restructure it before the payment is due. Finding a solution in advance for a late payment will help avoid your rating being lowered.

Moving forward

When you improve your financial habits your credit rating rises. However, be aware that even if you have a history of good habits, occasional missed payments will have an adverse impact.

If you don’t want your financial information made available, you can request from the Bank of Israel that your financial data isn’t consolidated. However, should you then need a loan your only significant option will be going to your bank who will not offer you preferential rates as they have no incentive and no competition.

The purpose of the credit rating system is to make us all more financially responsible. Check your rating now, and if you aren’t in the top category, do everything possible to improve it. As I said earlier, the rating isn’t dependent on the amount of assets you own, rather how you utilize them. Be proactive and improve your rating so you can get preferential terms should you need a loan. Behatzlacha raba!