As we approach the festive season it is important to remind ourselves that credit is wonderful when used for its intended purpose. With a proper checklist prior to applying for credit, you will sure avoid getting over-indebted.
The National Credit Act (NCA) gives direction to credit providers when it comes to over-indebtedness and reckless lending. When a consumer applies for credit, there are guidelines which the credit provider should follow which secures them from lending money or providing credit recklessly to the consumer.
Over-indebtedness is when a consumer is over committed financially, and he/she is unable to take on more debt. To determine this the credit provider would have to do an evaluation on the consumers finances, taking into consideration already existing credit agreements and the income and expenditure of the consumer. They are also required to check past debt repayment behaviour, reflecting on the consumers credit profile, to determine whether the consumer can satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party.
Over-indebtedness is rife in South Africa, and there are several contributing factors to the hike in the numbers of over-indebted consumers. One which we would like to tackle as the Credit Ombud would be to assist consumers in making informed and intent decisions before applying for credit – taking preventative measures. Getting stuck in a debt trap causes frustration that may lead to depression because you feel that debt has overpowered you and you no longer have any control. We want to teach the consumer to take that control back. A sure way for a consumer to avoid over-indebtedness is to do a self-evaluation of your current financial state.
So, what is it that one must consider prior to applying for credit to avoid being over-indebted? Here is a checklist for consumers to use before they go and apply for credit:
- Distinguish whether need or want? – Credit is a tool. A tool that is meant to assist in advancing in one’s life. Ideally, we would purchase everything in cash however with the big purchases such as cars and houses, we need the assistance of a credit provider. Therefore, before you even go and apply for credit, ask yourself whether you NEED to acquire the credit or is it a want. At times what we want can wait, so you can either save up for the item you want or lay-by it. If you need to draw up and list of pros and cons, then do so. But do not go and apply for credit if you have not put a plan in place on how you intend to pay it back.
- Affordability – Credit providers are required to do an affordability assessment for every consumer who applies for credit. What the Credit Ombud advises is that the consumer does their own assessment at home before they approach the credit grantor. You will be required to do a realistic budget, one where you are honest with yourself about your spending habits. Your budget does not only entail the major monthly expenditures and commitments such as school fees, debts, groceries, transport, etc., but it should include your entertainment, your beauty treatments, and all other extras which we enjoy and spend money on. Even the month-end takeaways. This exercise needs for you to be honest with yourself. Get a 3-month bank statement and see how and where you spend your money, your bank statement can never lie to you. Becoming your own personal accountant will help you to account for every cent spent.
- Interest and other added fees – Part of that affordability is knowing and understanding the interest and other added fees which is charged and make up the total cost of credit. a monthly installment is inclusive of the interest and other added fees, which the consumer is made aware of when applying for credit. Before a consumer puts their signature on the dotted line, the credit provider needs to have been provided with the total cost of credit and understand what the total monthly installment will be. Part of the purpose of the NCA is to promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market industry – when applying for credit it is advisable that various credit providers are approached with the aim of obtaining a competitive interest rate and the best price possible. A consumer is well within his/her rights to compare these prices in reaching an informed decision.
- Cooling off periods – Before committing to a new credit agreement, consumers must know and understand fully what they are binding themselves to. Prior to the conclusion of a credit agreement, consumers must be given a pre-agreement statement and quotation. The statement is a document that details the terms and conditions of the credit agreement the creditor is offering. The quotation discloses all the costs of the credit, showing the principal debt, the repayment schedule, the interest rate, other credit costs and the total cost of the proposed credit agreement. If you agree to and sign these documents, these become the credit agreement. The National Credit Act requires that credit providers must disclose and explain the total cost of credit to consumers so that they understand what they are agreeing to. What is important to note is that consumers do not have to accept the offer in the pre-agreement and quotation agreement. Consumers have up to five business days to consider the offer and can decide not to accept the offer of credit. The quotation is valid for five business days, meaning that the consumer has some time to consider whether to enter into the proposed credit agreement once they understand the cost implications (and own affordability). At any time before the expiration of the five-day period, consumers may hold the credit provider to the terms and conditions as disclosed in the pre-agreement statement and quotation.
- Credit bureau profile – Again, we remind consumer to check their credit profile at the credit bureau before they apply for credit. When was the last time you checked your credit profile? The NCA does give provision to the consumer to get a free credit report from each credit bureau in a 12-month period. Something we seldom do is to check our credit profiles before we go and apply for credit. How does it help you to check your credit profile before applying for credit? Well, you do not want to be turned back by the credit provider due to you having a low credit score. And this may even be because of an outdated account which may be reflecting on your credit profile. So, if you check your credit profile before you go and apply for credit, you can dispute any incorrect or outdated information with the credit bureau where the information is reflecting, which may prevent a successful credit application. Once you have checked your credit profile and have updated all information that would have affected your chances of obtaining credit, then you will be closer to getting that credit.
- Credit life insurance – Let us remember that credit life insurance is there to protect the consumers credit obligations should there be an event beyond your control where you won’t be able to earn an income. You do not have to accept the in-house insurance offered by the credit provider. Shop around to find a service provider who will offer you the best benefit that will be suitable to you. Several consumers are not even aware that they have credit life insurance. They continue to pay monthly installments which are inclusive of the credit life insurance however when they come across a situation which requires them to get the assistance of the credit life insurance, like retrenchment, they do not submit claims because they aren’t aware that they have this benefit. Read the terms and conditions to that insurance and understand them for your own protection.
Lastly, what is also important is to know where to go when you need help. The Credit Ombud office provides FREE assistance and advice with all credit bureau and credit agreement related matters.
- Overcharging of interest or fees
- Prescription of debt
- Reckless lending
- Debt collection issues
- Emolument attachment orders/Garnishee orders
- Unfairly or incorrectly listed at the credit bureau (judgments, defaults, etc.)