The good, bad and ugly when it comes to credit

The Covid-19 pandemic has had a dramatic effect on the South African economy, which has left many people in debt.
Being responsible with credit can prevent people from living beyond their means and can also be beneficial when wanting to apply for finance.
Eloise Boezak, head of customer experience at African Bank, said many South Africans pay little attention to their credit score until it is too late.
It is concerning to see that only 9% of the 25 million credit-active South Africans access their credit report annually.
A credit score is a three-digit number created by a Credit Bureau to explain your credit behaviour, calculated using information received from credit and service providers.
Using a formula, this number is calculated based on how well you pay your accounts.
Good credit profiles are gained when you borrow money and pay it back regularly, on time, and for the full amount.

Also read: Understand your credit life insurance

A credit report is a record of your credit history and payment behaviour that is maintained by credit bureaus.
Consumers must look at the accuracy of their credit reports regularly with all consumers being entitled to a free credit report every 12 months from any credit bureaus in South Africa.
During Money Smart Week South Africa (MSWSA), a financial literacy initiative held in March, the topic of credit and good credit history was addressed by several organisations and industry bodies.

Credit and a growing economy
“When consumers and businesses are able to borrow money, economic transactions are made possible, which in turn lead to the growth of the economy,” said Kwanda Vabaza from the Ombudsman for Banking Services.
“It is clear that credit has an important role to play in maintaining a functioning economy. With that being said, the irresponsible use of credit may lead to unmanageable debt, which has an impact on the consumer’s finances and quality of life,”
While a rise of consumption and investments creates jobs and leads to a growth of both income and profit, for those consumers who have lost jobs, have reduced incomes, have used up their savings or who just cannot come out on their salary, resorting to distressed borrowing can lead to becoming overindebted.
“Credit is important as it allows people to buy products and services when they don’t have the full amount to pay for it.
“When you are buying a product or securing a service, the credit agreement allows you to pay it off in the future. There are many things we would not be able to buy or use if we did not have credit,” explained credit ombudsman Howard Gabriel.
Cars, houses and other large purchases are usually bought on credit with finance plans that are suitable for the consumer.
These big-ticket items are an important contributor to the economy, which is most often bought on credit.
Whilst credit helps you acquire the goods and services you need, you must understand the responsibility and commitment made from the onset.

Also read: Credit reports can make or break a property deal

What the numbers say
Recent data by global information and insights company TransUnion revealed that out of the 54 million consumer accounts measured in South Africa, there is an increase in defaulting of credit repayments and an increase in weaker cash flow.
Furthermore, a report by the National Credit Regulator (NCR) earlier this year found that 40% of credit-active South Africans are facing an impaired credit record.
The Debt Counselling Association, the professional body representing registered debt counsellors in South Africa, reports that 10 million people in South Africa have bad debt, meaning that they have missed three or more monthly repayments.
Kabelo Teme from the office of the Credit Ombud says that people need to try as hard as possible to stay disciplined when it comes to credit.
“Avoid purchasing on credit and if you must, then ensure that you understand the total cost of credit. Always understand the added costs of buying on credit and consider your ability to repay the debt. Without this understanding, you may be signing up for financial troubles,” she said.

Qualifying for credit
While the National Credit Act states that all consumers have the right to apply for credit, not all consumers will qualify and receive this credit.
Generally, a consumer is denied credit when a prospective credit provider assesses the applicant’s creditworthiness and finds evidence of failed payments, lack of any kind of borrowing history or any sign of a negative past repayment experience. Once again, this reinforces the importance of maintaining a good credit score.
The Financial Sector Conduct Authority (FSCA) also advises consumers to only deal with authorised financial service providers or authorised credit providers when applying for credit or when seeking any financial advice.
The financial institution’s regulator also warns consumers to avoid resorting to illegal money lenders should they not qualify for credit.
Consumers who wish to conduct financial services with an institution or person are urged to check beforehand with the FSCA on either the toll-free number (0800 110 443) or on the website, www.fsca.co.za, as to whether or not such an institution or person is authorised to render financial services.

Also read: Speak to your creditors before things get bad

FACT BOX:
How to maintain a good credit history:
• Manage your accounts.
Make sure you pay your accounts in full every month. Partial payments can negatively impact your score and leave you playing catch-up with growing outstanding debt. It will be wise to bring your arrears payments up to date and see how your score will improve once your repayments are up to date and kept up to date. Eventually, you will be in a position to apply for new credit.
• Limit your amount of debt.
Keep the use of your current credit facilities below 35% of your limit.
• Address negative listings.
Take active steps to settle outstanding debt if you have any judgments and defaults against your name. Remember to request settlement documentation to clear your credit record.
• Grow your credit history.
Long-standing credit accounts that are consistently settled in full reflect positively on your repayment reliability. Where possible, maintain a healthy mix of secured credit (home loans and vehicle finance) and unsecured credit (store accounts and credit cards).
• Limit your enquiry activity.
Don’t shop around for too much credit at the same time. Numerous applications could raise a red flag to lenders about your current financial situation.
For those consumers concerned about their credit score or debt, contact:
• National Debt Mediation Association (NDMA) on 086 111 6362 or go to https://ndma.org.za/
• Credit Bureau Association (CBA) on 0800 029 999 or go to https://www.cba.co.za/
• National Credit Regulator (NCR) on 0860 627 627 or go to https://www.ncr.org.za/

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