For some people entering into debt is a bit like playing Russian roulette. The bullet may or may not fire, it may or may not end the game. Whereas it may be exciting to live on the edge, it may have devastating consequences.
Money, as we have often said to one another, is an emotive resource. We buy when we’re hungry, sad, mad or want to chase a fad. Just as being awarded a loan does not mean validation of your intrinsic worth as a Good Citizen, so having a loan application turned down does not mean a rejection of you as a person!
We also know that where there is desperation there will be someone who makes it their business to exploit it.
The National Credit Act (35 of 2005)
The purpose of the NAC is to protect consumers from reckless lending practices (considering both the social and economic welfare of the person) and make things fair, transparent, competitive, sustainable, efficient and effective. It enshrines the following consumer rights:
- To apply for credit
- To be protected from discrimination
- To be informed why you didn’t get it (but you have to ask!)
- To receive a free copy of any credit agreement entered in to
- To receive such an agreement in language that is clear and easy to understand
- To understand all fees, costs, interest rates and total amounts due
- To have your information treated confidentially
- To be given the choice to say no to credit limit increases
- To decide how and if you want to be informed about additional products or services
- To apply for debt counselling if you feel overwhelmed by debt
Because of the above-mentioned act, Creditors are careful of giving you their money. No matter how convincing you are, any creditor worth their salt will consult a credit bureau. If they don’t, be suspicious!
TransUnion is not a railroad company
There are four main credit bureaus in South Africa – Experian, TransUnion, Compuscan and XDS. Why are there more than one? Well, each may hold slightly different information about you since different creditors report to different bureaus – some may report back to all four and others may only report to one or two. It may therefore be a good idea to periodically look at your reports from different bureaus.
You are entitled, as per the National Credit Act, to one free enquiry per year from all of the credit bureaus. At Northwood we suggest that at the very least you use TransUnion – the largest of the four.
Your credit score is a three-digit number that relates to how likely you are to repay debt. Banks and lenders use it to decide whether they’ll approve you for a credit card or loan. It goes a bit further than that though – the less of a credit risk you are, the better the chances are that you will be charged less interest.
TransUnion scores work as follows:
- 0 – 615 = poor
- 615 – 729 = fair
- 730 – 821 = good
- 822 – 917 = very good
- 918 – 999 = excellent
Your scores are based on factors such as:
- Your payment history
- How long you’ve had credit
- The types of credit you have (credit cards, auto loans, student loans, mortgages, etc.)
- Your credit limits and how much of those limits you’re using
- How much debt you have
- Hard inquiries on your credit report
The last bullet is important – how many people enquire about your credit worthiness counts against you! This is why it is important to a) get your free credit report once a year so that you can know where you stand and b) make use of a bond originator if you are considering how to finance the buying of a property – such a person can approach multiple banks in one go and it will count against you as only one inquiry.
Your score will NEVER be based on the following factors:
- Marital status
- National origin
Protection from identity theft and other rude shocks
Even if you are not contemplating entering into debt right now, there is another reason for checking your credit records annually. You may not otherwise be aware that someone else is living your life! Unfortunately, identity theft is escalating at an alarming rate. It is believed that someone’s identity is stolen somewhere in the world every two seconds! According to TransUnion, this is a ‘silent’ crime and could go undetected for years. Your cards and accounts may be cloned. Your passwords and verification details may be obtained through malware or phishing programmes and viruses. Keep your information safe, regularly update your anti-virus software, change your passwords regularly and keep a look out for suspicious transactions.
Sometimes companies do not timeously update details, such as resolved debt issues or do not accurately reflect outstanding amounts. A credit check reflects the state of things at that particular moment. Remember, each credit check counts against you. Ensuring that your details are up to date is therefore vital, so that unnecessary enquiries are eliminated.
Playing with calculators – preparation is better than cure
Now that you have a good understanding of your current financial health, it is important to educate yourself around the implications of taking on more debt. Your financial advisor is a good resource in terms of this, as they will be able to help you consider your unique circumstances and help you crunch the numbers. However, as part of self-empowerment or in preparation for meeting with your advisor there is something else you can do.
There are a number of online tools, like calculators that can help you to work out how much big ticket debt will ultimately cost you. One such an example can be found at www.financecalculator.co.za
Most of the major banks also have online calculators. Of these, Nedbank has the widest and most sophisticated collection – 17 calculators!
Be informed, but know it may not be the whole truth
Obviously, these calculators should be used for information and planning purposes only and will not necessarily reflect the final amounts you will be charged. Remember, your credit score and perceived risk profile could affect interest rates offered to you. Knowledge may now be at your fingertips as you touch type your way around the internet, but wisdom is recognising the value of human engagement – once you’ve done your homework, check the answers against sound professional advice.