CREDIT SCORING SYSTEMS

A low credit score could be costing you thousands of rand a year. Credit-scoring systems are used by creditors to determine how much you can borrow, the interest rates you pay or the cost of life insurance. If late payments, bounced checks, or bankruptcy have ravaged your credit, here are five steps to restoring your financial health.

1. Monitor your "debt-to-income" ratio
Your debt, not including your bond repayments, shouldn't exceed 15% of your take-home pay. For example, if you earn R10 000 a month, the amount you owe on credit cards, car payments and other debts should never top R1 500. If you're paying more, it may be time to cut back.

2. Pay more than the minimum and read the fine print
Many South Africans pay only the required minimum on their credit cards. The bulk of these payments go toward interest on your debt and bank fees. The higher your payment, the more of it goes toward your principal balance. Also, to determine when your annual percentage rate (APR) may be increased and keep interest rates from creeping up on you unexpectedly, read the fine print of your credit card agreement.

3. Check your credit report annually
Many consumers are paying higher interest rates than they should, because they've failed to correct errors on their credit reports. Get in the habit of checking your report at least once a year to ensure that all of the information is accurate. South African consumers are entitled to one free check annually.

4. Hang in there
Negative information on your credit report can typically be reported for seven years. But the more time passes, the less damaging the information becomes. After 10 years everything from late payments to bankruptcy is expunged from your credit report and you effectively start from scratch.
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THE NATIONAL CREDIT ACT (NCA) OF SOUTH AFRICA

In a nutshell, the Act:

Provides one set of rules for all credit activities,
Aims to prevent reckless lending, over-indebtedness and unfavourable lending practices, and
Establishes new and improved rights for credit consumers.

The 7 most important aspects that you should know about the NCA

1) Who does the Act apply to?

The NCA applies to credit agreements with all consumers entered into after 0I June 2007, and to entities such as close corporations, companies, partnerships and trusts, whose asset value or annual turnover is below R1 million.

This new legislation will affect you if you are applying for any of the following types of products:

Overdrafts
Credit cards
Instalment agreements
Mortgages
Financial leases
Loans
Hire purchase agreements

2) Consumer rights                                                                 Top

Credit bureaus: The Act gives consumers the right to access and challenge their credit record and information held by credit bureaus. In addition, all information that credit bureaus keep about consumers is regulated.

Language: Consumers have the right to receive documents in plain and understandable language and they may also request a document in any one of two official languages.

3) Marketing practices

The Act aims to put a stop to misleading advertising around credit, credit products and facilities, and the cost of credit.

Negative option marketing (whereby an agreement will automatically come into existence unless an offer is specifically declined) is not allowed
Phrases like "no credit checks", "free credit", and "guaranteed loans" cannot be used. Marketing of credit at the consumer's home or workplace is prohibited without the consumer's consent.
Consumer choices must be obtained and kept as a record.

4) Pricing

All new credit agreements need to disclose interest rates, fees and additional charges and also subjects interest rates charged to a maximum rate of interest that may be charged. These cost controls prohibit interest or other costs in excess of those prescribed rates.

Add-on costs for insurance are prohibited. All costs must be advised in advance and the consumer has the right to arrange insurance directly, rather than pay the credit provider to do so, and to choose to arrange his or her own insurance policies.

5) Applying for credit under the NCA

Pre-agreement: The credit provider must provide the consumer with a pre-agreement, containing the main features of the proposed agreement and a quotation of the costs. This pre-agreement is valid for 5 days and gives consumers an opportunity to shop around for the best deal.

Credit assessment: The consumer will be required to provide certain information in order for the lender to assess affordability. This may include a detailed statement of income and costs, a household budget and details of other credit commitments.

Credit bureaus: The Act requires the credit provider upon entering or amending or terminating a credit agreement to report the transaction to a credit bureau.

Records of application: Credit providers will be required to keep records of all applications for credit, credit agreements and credit accounts for a prescribed time.

Payment of accounts: A consumer may pre-pay any amount owing at any time, and fully pay out the account at any time without penalty, except in the case of mortgage bonds or agreements in excess of R250 000, which are subject to a termination charge of not more than three months interest.

Spouse's written consent: For marriages in community of property, the Matrimonial Property Act, following from a consequential amendment made by the NCA, requires the written consent of the spouse, when one spouse applies for credit.

6) Over-indebtedness and reckless lending                              Top

The Act aims to promote responsible credit granting and use. To achieve this, when a customer applies for credit, a credit provider would need to check whether the consumer can afford the credit because if no check is done or if it can be shown that the consumer clearly could not afford to repay the credit agreement, it could be alleged that the credit provider has granted the credit recklessly, with severe consequences to that credit provider.

During this affordability assessment, the onus is on the consumer to fully and truthfully answer any request by the credit provider for information.

In the case where a consumer gets into too much debt, a debt counselling service is offered.

7) Complaints

The National Credit Regulator will monitor credit providers and their compliance with the Act and regulations.

A National Consumer Tribunal is established to adjudicate in a wide variety of applications, and to conduct hearings into complaints.

Click here for a more complete summary of the Act.


USEFUL CONTACTS

THE NATIONAL CREDIT REGULATOR (NCR)

The National Credit Regulator (NCR) was established as the regulator under the National Credit Act 34 of 2005 (the Act) and is responsible for the regulation of the South African credit industry. It is tasked with carrying out education, research, policy development, registration of industry participants, investigation of complaints, and ensuring enforcement of the Act.

Call centre 0860 627 627
Website www.ncr.org.za
Email info@ncr.org.za

Small Business South Africa - Credit for Small Business South Africa
BRIDGING FINANCE

Bridging finance essentially is a short term loan that is set up between you and a financial institution that specializes in these loans, which allow you to gain access to your money. Companies that specialize in bridging finance offers property sellers, buyers and bond "switchers" access to percentage of the value of the net surplus proceeds of their transaction. Such lenders usually base their calculations on a percentage (typically 80%) of the net future amount due to you. Actual fees may be negotiated if the size of the bridge loan is large.

Bridging finance is widely used in property transactions to overcome the obstacles presented by time delays. If you need bridging finance while waiting for your property to be transferred, the bridging finance company will calculate the maximum loan you qualify for, as follows:

Selling Price of your house : R 500 000.00
Amount owed on bond : R 300 000.00
Difference : R 200 000 .00

Maximum Bridging Finance % : 80%
Maximum Bridging Finance amount : R 200 000 x 80% = R 160 000

You will therefore be able to borrow R 160 000 against the proceeds of the sale of your home.


BLOW TO BANKS AS INDEBTED GET A BREAK

A new ruling by the Supreme Court of Appeal (SCA) is good news for the indebted, who will be able to get out of debt faster, but holds a frightening prospect for the banks.

The SCA considered the in duplum (double the amount) rule. It means that once in default you never have to pay back more than double the unpaid capital borrowed – even if more interest has been running up.

The in duplum rule has been in SA common law for many years, but didn’t really protect clients.

Say you borrowed R100 and didn’t pay the debt. With interests and charges, the R100 soon ballooned to R200.

If you pay off R50, the banks would classify it as a payment to settle part of the interest, and then charge interest and charges on the remaining R150 until it reached R200 again.

That would happen every time you made a payment which did not settle the capital amount.

This meant you would struggle for years to get out of debt. But in 2007, the new National Credit Act (NCA) attempted to place a real cap on debts.

It imposed a fixed limit on the total amount of interest and charges on unpaid debt, so that you will only ever owe double the unpaid capital amount at the time of default.

So if you borrowed R100, and interest and fees amounted to R300 but you had paid R50 of the capital – you would only owe R100 – double the unpaid capital of R50.

More interest and charges cannot be added as you make payments.

In 2009, following opposition from the banks, the National Credit Regulator (NCR) got the high court to confirm that a ceiling is in place, but the banks took the case to the SCA. They lost.

In its recent ruling, the SCA found that the NCA differs from the common law rule in that it is not only limited to interest but also includes initiation fee, service fee, credit insurance, default administration charges and collection costs.

“The court said this section of the law helped to prevent unreasonable over-indebtedness of the consumer,” says NCR manager of strategy and education, Peter Setou.

This is very good news for consumers, who will now get out of debt a lot faster, says Luke Hirst, managing director of the debt counseling group DebtBusters.

It is expected to hurt credit providers who charge high interest rates of above 40%, as those debts will reach in duplum without breaking a sweat.

But the large banks also face a scary scenario following the ruling, says Hirst.

The interest and fees on home loans could quickly reach double the initial capital amount.  Take the example of a home loan client, particularly one with a very expensive property, who falls into default by only R10 a month.

If the bank doesn’t pick up the shortfall, the client can years later claim that he is in default and only needs to pay back double the capital amount.

This could potentially leave the bank with substantial losses.

BAD NEWS FOR CONSUMERS

Another recent court ruling, however, holds bad news for consumers. The case focused on which credit agreements can be excluded from the debt review.

Currently, if you already received a summons about a debt – that debt cannot form part of your debt review. It means that your debt counsellor can’t negotiate to lower the monthly payments of that debt.

“When consumers become over-indebted they can approach a debt counsellor in order for their debt to be rearranged,” explains Setou.
  “Normally all the consumer’s credit agreements would fall under the debt restructuring process. This means that the credit provider cannot enforce the agreement and take the consumer to court (issue a summons) or attach their assets to settle outstanding debt while they are under debt review.”

But under the NCA, an exception to this is when the credit provider has already taken steps to enforce a credit agreement. That credit agreement is excluded from the debt review process.

“In practical terms this means the credit provider can then take further legal action against the consumer to enforce the agreement,” he says.

The banks contended that as soon as a Section 129 notice is issued to a consumer, which warns them that legal action may follow unless they take action, this debt is excluded from the debt review process.

“The NCR argued that the notice to a consumer is only a notification and not a step to enforce the credit agreement, because, this will have the effect that if a consumer was even one month in default, their credit provider could issue them with a Section 129 Notice and they would not be able to apply for debt restructuring to help them pay back their debts,” said Setou.

The SCA agreed with the banks’ approach and interpretation of the Act saying that as soon as a consumer received a Section 129 Notice in respect of a specific agreement, that agreement is excluded from debt review.

So far, most banks have been quite lenient on including debts under debt review where a section 129 has been issued, as long as clients are making a decent monthly payment.

Hopefully that will not change, says Hirst.

The latest NCR figures show that the number of South Africans who have fallen behind on repaying debts have increased to more than 8.6m – or 46.5% of credit-active consumers.

Helena Wasserman - Fin24
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