Credit allows us access to funds for those big purchases – perhaps a business vehicle or bigger premises. You need to apply for credit to make these purchases, and credit providers will check your credit rating to help them decide whether or not to grant you credit. Your credit rating gives an indication of how you have managed your debt and whether you will be able to manage future debt well. Should you be in arrears or have defaulted on your payments, you may not get credit at all, or may be granted a lower amount than you applied for.
Your credit score is calculated on a number of factors including your payment history, the debt you have incurred, and how that compares to other consumers. In general terms, the higher your score, the lower your risk profile and the better your chance of being granted further credit. If you have a negative listing on your credit profile because you did not pay an account, you can be blacklisted. There are various implications for this, depending on how serious the negative listing is.
What you need to know
Do you know what your credit rating is? Have you been blacklisted because of bad debt? Why is it important to have a good credit rating? These questions have important consequences for your business.
- Arrears: You are in arrears if you have failed to make a payment on an account. To rectify this, approach your credit provider and arrange to settle the outstanding amount – there may be a fine to do so, but it will prevent any legal action being taken. This information will reflect on your record for five years, and may result in credit providers not being willing to grant you credit as you are considered a high risk, or you will have stricter payment terms and higher interest rates.
- Default: Your credit profile will reflect that you are in default if you have not paid an account that is in arrears, and the debt has been handed over to a debt collection company. Credit providers will see you as a high-risk client, and your chances of getting credit are slim. A creditor will write off debt if they feel the chance of recovering that debt is low or that the cost of doing so is too high. This will reflect on your credit profile for two years. It is best to enter negotiations with the debt collectors immediately to pay off the outstanding debt. You may be able to negotiate your way out of paying all additional fees and interest as you are currently in distress with regard to your financial status, if the creditor is willing to agree to this.
- Judgment: This means legal action is being taken against you for not having paid your outstanding debt. This is serious, as it is difficult to reverse a judgment and it has longstanding consequences. For amounts below R100 000, judgments will be handed down by a magistrate’s court, and the judgment can be rescinded or reversed if you pay off the debt. For amounts exceeding R100 000, the judgment will be made by a high court – and this judgment cannot be rescinded unless it was issued in error. The record will show on your credit profile for five years. If you do not settle the amount owing, the debt will remain active for 30 years – which means the fees and interest owing on that debt will keep growing and can become exorbitant. Your chances of getting credit after a judgment has been issued against you are very poor.
- Sequestration: When you are unable to pay your debts and your assets cannot pay off what you owe, an application can be made to the high court to be declared insolvent or bankrupt. Sequestration will remain on your credit profile for 10 years, and you will be unable to apply for credit.
How to avoid being blacklisted and improve your credit rating
Bad credit is not the end of the road. There are steps you can take to avoid being blacklisted – or, if you have a negative credit listing on your profile, to improve your credit rating:
- Pay your accounts every month.
- Work out a budget and stick to it.
- Notify your creditors if your address changes.
- If you have an account in arrears, take steps to pay it off immediately.
- Read the small print of any contract.
- Do not ignore legal documents or letters.
- If you cannot pay your monthly instalment, contact your creditors immediately to make alternative arrangements in writing.
- If your accounts are in arrears, contact the non-profit organisation National Debt Mediation Association, which can assist in negotiating a settlement. Visit www.ndma.org.za.
- If you have defaulted on a payment, find out whether the debt is with a debt collection agency, as they may be willing to enter into a settlement.
- Once you have paid off your debt, obtain a paid-up letter from the credit provider or debt collection agency to submit to credit bureaux, to update your credit profile.
- Be informed: you are entitled to one free credit report annually from credit bureaux – visit www.creditombud.org.za/links.htm for a list of the relevant bureaux.