Top 11 Credit Mistakes

Michael Bouchier looks at the credit mistakes we often make – and how to fix them...

1. Spending money you don't have

It's quite a simple concept really, but we all do it – spend money we don't have. How do we do it? We create debt. Any time you spend more money than you have, you have gone into debt.

Let's say for instance you successfully apply for a credit card, and you're quite happy with this new prestige symbol. The bank has granted you a limit of R5000, and you spend R2000 in the first month. When you receive your first statement from the bank they will indicate that they expect you to pay R100 this month towards the outstanding balance. You do so. Guess what? You’ve created debt of R1900!

The simple formula: if spend is > income then you’ve created debt!

2. Pre-spending money you expect to receive in the future

You've submitted your tax return and met the deadline. Your tax consultant tells you that SARS owes you R8000, and you're quite pleased about this. It was difficult to get by every month because so much of your salary was going to the taxman. Its feels good to have someone else owe you money instead of owing all these creditors money – the banks for your car and home loan, the credit card companies for your credit card, the school for your kids school fees etc. Owe, owe, owe – where does it ever stop?

The next weekend you go shopping in your local mall, and you happen to walk past a travel agency that is advertising a special to Mauritius for R6500 per person, all inclusive, 7 night stay. You briefly start to dream about how wonderful this would be, before it occurs to you that you can't afford this luxury at this time. You’ve got school fees due soon, you need to catch up the arrears on your rates & taxes and light & water, and you overspent on your credit card last month, so you need to throw some more money in there, right? No, you can't afford it, its just too expensive.

Suddenly you remember the tax refund, and your heart skips a beat, then two. Maybe you can afford it. After all, the refund will definitely happen, wont it? The flight leaves in a month, and the taxman has been slow at refunding lately – you know, because you waited for 8 months last year. But what the hell, the money will come. You walk straight into the travel agency, book the trip, and rationalize that you will refund yourself when the taxman refunds you.

What's wrong with this scenario? Three things.

Firstly, the refund from the taxman is not guaranteed. He could disagree with your tax consultant, and you could actually end up owing the him money!

Secondly, you will need to finance the cost of the trip pending the refund. This will probably involve going into debt, and there is an interest cost that you will need to factor into the cost of the trip.

Thirdly, is the prospect of a refund not an opportunity to save and invest the money? Get the money working for you, save it, invest it and watch it grow. That's the real clever way to do it!

3. Consolidating debt into a consolidation loan

This can be a wise thing to do, but a lot of people get it all wrong. It's wise if you have some expensive debts "hanging around" that you want to tidy up and consolidate into a larger debt, and then use the full payments that you were spending on the smaller debts to "throw into" the repayment of the large consolidated debt. It's not wise if you simple want to reduce your monthly commitments by extending the term of the repayment of the smaller debts.

Let's look at an example. You have the following debts and commitments:

DEBT OUTSTANDING BALANCEINTEREST RATE MONTHLY INSTALLMENT
Bond R350 00011% R3612
Car loan R200 00013% R4550
Credit card R15 00022% R750
Overdraft R20 00017% R1000
Total R9 912

You've owned your home for 8 years now, and although you bought it for R370 000 it's now worth over R1 million. So your monthly debt commitments are R9912, and since you earn R15 000 a month after tax, you only have a little over R5 000 left live on, including all your debits orders – insurance, armed response, levies etc, medical aid etc, and also including groceries, paying the maid, petrol etc.

On the advice of a friend consolidate your car loan, credit card and overdraft debts into your home loan by raising a second bond on your property. So your debt portfolio looks as follows:

DEBT OUTSTANDING BALANCEINTEREST RATE MONTHLY INSTALLMENT
Bond R585 00011% R6038

Voila! You saved R3874 (R9912 minus R6038) immediately.

What's the problem? There are two issues.

Firstly, you are now paying off your car, credit card and overdraft over the next 20 years – the term of the home loan, versus the much shorter term of the car loan, resulting in an additional debt cost of R386 012 (R621012 less R235000).

Secondly, it is likely that, unless you exercise extreme care and diligence, you will begin to run up your credit card and overdraft balances again, and within a year or two you will once again have large short term debt, and you will again need to consolidate your debts, once again costing you lots of money.

4. Opening lots of store accounts

It's human nature! We want it, we can't afford it, and then the store comes up with a plan for you to be able to buy it. We go for it! We get suckered into paying for things we can't afford, and we go into debt to be able to do so. Store accounts are great provided you repay the full outstanding balance every month, or if you open them in order to receive the incentive free vouchers, and then close them once you have received the benefits.

Remember that with a store account you are paying for things you can’t afford with money you don’t have. All these purchases are consumables, and you generally don’t have something substantial to show for your purchases.

5. Missing payments

Whenever you miss a payment on an account, the details of this missed payment are sent to the credit bureaus, and a record is kept for the next 2 – 3 years of these missed payments. Conversely, when you meet your payment obligations on time, a record of this fact is sent to the bureaus.

When you apply for credit with a credit provider, they look at your credit record with the bureaus, and it you have missed payments or paid late, they take this to mean that you are a poor payer, either because you are not diligent in the payment of your accounts, or because you are over-stretched financially, and are battling to meet your commitments. This is a sign they should not lend you more money.

Don't miss payments.

6. Keeping unutilised credit facilities

Starting from June 2007 the National Credit Register will keep a record of all your credit agreements, meaning your debts. If you have a credit facility of R20 000 on your credit card, and you are only utilizing R6 000 of this facility (your balance on your credit card is R6 000) then when you apply for a bond, for instance, the bank will check this register, and will have to assume that you are utilizing 100% of your facility – the full R20 000! This may lead them to conclude that you are not able to afford the home loan repayment as you have too much debt.

Try to reduce your facility to only that which you expect to need. In this case, reduce your card facility to R6 000 or R8 000.

7. Excessively shopping for credit

Every time you fill out a credit application you are giving the credit provider permission to access your credit reports. When they access your credit reports this fact is recorded in your credit records as an "enquiry”. This will remain on your credit record for 24 months.

Enquiries are used by credit scoring models to determine whether or not someone is shopping for credit. It is a statistical fact that consumers who have more inquiries are higher credit risks than consumers with fewer inquiries. As such, the more inquiries you have the more points you will lose in your credit scores.

It's a closely guarded secret as to how many enquiries is too many and will have a negative effect on your credit scores. We would say that having less than three enquiries within a 6 month period is acceptable, but more than three starts to lower your scores.

8. Not understanding that there are 2 credit bureaus and scores

Many people think that there is only one credit bureau that keeps your credit record, namely TransUnion. Actually, that company used to be known as ITC, before it changed its name to TransUnionITC, and then to TransUnion. The other bureau is known as Experian. Both companies are large international companies, and have a strong influence on your ability to get credit.

Each bureau may have different information on you. They do not share their information because they are competitors. You should check your credit record with each company if you want a comprehensive view of your financial reputation in South Africa. We recommend that you draw off the Credit Health Report™, which is a report that combines the information straight from both bureaus in an easy to read, simple format.

9. Not understanding your rights in terms of the National Credit Act

The National Credit Act came into operation fully on 1 June 2007, and gives you more rights than ever before. Some of these are:

  • Quotes must be given on all credit agreements, and are binding fro five days
  • Advertising and marketing must contain prescribed information on the cost of credit
  • Language in credit agreements must be simple and understandable
  • Credit sales at a person’s home or work are strictly limited
  • Reasons must be provided if a credit application is declined
  • Reckless lending is prohibited – you are not entitled to borrow money if you are over-indebted;
  • Affordability testing is mandatory and credit providers are required to explain the risks to consumers before an agreement may be entered into.
  • Interest and fees are regulated on all agreements, including micro-loans;
  • Credit bureaus are regulated and consumers have the right to a free credit bureau record;
  • Debt counseling, as mentioned above, is introduced, to enable restructuring of debts for over indebted consumers. You need to know your rights. If you are unsure, approach Logan Attorneys for advice on 011 242-4901.

    10. Assuming that a judgment that falls off your credit record is now forgotten

    The compulsory data retention period for a judgment to remain on your credit record is 5 years. It can however be removed before this time by making application to court to rescind (reverse) the judgment. This application would typically be made through an attorney. We recommend the services of Logan Attorneys, as they are specialists in this field.

    Some people who have not settled the debt that underlies the judgment simply wait for the 5 year period to expire, thinking that the issue will go away. This is not the case. A judgment is an order of court for a period of 30 years. This means that the judgment creditor can use the judgment for a further 25 years to force you to repay them.

    Specifically, using the judgment order, they can obtain an emoluments attachment order to either repossess your possessions or approach your employer and attach a portion of your salary monthly.

    If you have a judgment on your credit record, it is best to settle the underlying debt and to have an attorney rescind the judgment and remove the judgment from your credit record.

    11. Not having a credit score

    That's right. Not using credit is a mistake. The way the credit system works is that it rewards consumers who manage credit responsibly. The reward is in the form of easy access to credit at reasonable rates. If you choose not to use credit then you choose not to build a solid credit history, based on which future credit providers that you apply to for home or car finance will be able to assess your ability to repay them.

    If you'd like to learn more then visit www.credithealth.co.za

    Are you a victim of one or more of these mistakes? Tell us about it in the box below.

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