Understand the difference between blacklisting, judgements and defaults, and why it’s important to keep your credit record clean.
Your credit rating is your most important asset. Buying any big ticket items, like a new car or a house, can be extremely difficult once you’ve been blacklisted. That’s why cleaning up your credit record is one of the best investments you can make in your future.
The very first step towards cleaning up your credit history is to understand the difference between blacklistings, judgements and defaults, and why it’s important to address these issues as quickly as possible. Once you’re familiar with these terms and how they affect your ability to obtain finance, you can start to reverse any damage already done to your credit record, by cleaning up your credit history.
Can I buy a car once I’ve been blacklisted?
This is a tough one to answer, because each case is unique. However, as a general rule, you’ll need to settle any outstanding judgements before you can apply for car finance from a reputable financial institution. This should clear up your credit history enough to apply for finance, however, you’re still likely to incur a higher interest rate given that you’re a high risk individual.
Sometimes having a car is a requirement for applying for a job, so it becomes a vicious circle - you can’t afford a car without a job, and you can’t get the job without a car. If you’re unable to pay all of your outstanding judgements in full, you may need to consider leasing a car until you can afford to pay off your debt, at which point you’ll be able to apply for car finance. Alternatively, you may need to speak to your employer and negotiate terms to help you lease a car or apply for finance. Failing that, your only option is to buy an affordable second hand vehicle, which you’re able to pay for in cash.
Don’t be tempted to take out a loan from an irreputable financial provider. This is extremely dangerous.
Why is it important to address a negative credit rating as soon as possible?
Many South Africans struggle with debt, and often aren’t even aware that they’ve been blacklisted until they try to apply for a large loan.
Generally speaking, when a buyer is referred to an attorney it’s because they’ve already found their dream car, and are looking to make a purchase. At this point, they’re referred to attorneys to help them with their credit status and their subsequent inability to obtain finance.
Unfortunately, clearing your credit record is a lengthy process involving the buyer, the parties that blacklisted the buyer, and sometimes the court (in the case of judgements). This can be highly inconvenient when time is of the essence, and so it’s better address any debt-related issues as they arise to ensure that you don’t run into this problem.
It’s important to request a copy of your credit record from any credit bureau at least once a year, in order to know where you stand.
Who are debtors and creditors?
For those who aren’t familiar with accounting terms, we will be mentioning debtors and creditors throughout this article.
- A debtor is a person or entity (e.g. a company) who owes money.
- A creditor is the person or entity who has lent money, or extended credit (e.g. a clothing account) to the debtor. This can be either a person, a financial institution (e.g. a bank) or an organisation (e.g. a retail outlet or supplier).
What happens when you’re blacklisted?
Being “blacklisted” is an erroneous term, as it conjures up the image of a list of names of people who are not allowed to apply for credit.
This isn’t the case. There’s no physical list of people who are blacklisted - this is merely a term which indicates that you have an extremely poor credit rating. This is caused by not making regular payments on all of your accounts. If you have multiple defaults and judgements listed against your name, you’re considered blacklisted. This will affect your ability to obtain new credit - but it’s possible to recover.
It’s important to note that unemployment doesn’t cause a blacklisting.
Skipping payments on your accounts is the only cause of a blacklisting. If you find yourself unemployed, and are unable to pay your debts, you should contact all of your credit providers immediately to notify them of your unemployment and negotiate a new payment plan.
If you’re currently blacklisted, or feel you’re at risk of becoming blacklisted, you need to begin addressing any outstanding judgements and defaults immediately. Every little payment you make towards accounts that are in arrears will have a positive impact on your credit record.
What is your credit rating?
“The information retained by credit bureaus is regulated by the National Credit Act. Your credit profile is basically built from your credit history. The Act specifies how long this information may be kept on your credit profile. Payment history may be kept for two years. Adverse listings varies from 2-5 years. A judgement will typically be on your credit profile for 5 years”. He explains “all of these factors combine to make up your credit score” writes Wikus Olivier from Debt Safe, a South African debt counselling service.
What is a credit bureau?
A credit bureau is a private entity which collects, records and maintains your credit information, which is then sold to creditors in the form of a credit report. Every South African citizen who has applied for credit (including clothing accounts, cellphone contracts and so on) is listed with the credit bureaus.
When you apply to buy a car, or make any purchase that requires finance or monthly instalments (like renting property), the creditor can purchase a copy of your credit record. This is done in order to determine the risk of you defaulting on payments. If you’ve been flagged as a high risk individual (meaning you have been in arrears regularly in the past), you may incur a much higher interest rate or be denied finance entirely.
What does it mean to be in arrears?
When you fail to make your monthly payments on time, you fall into arrears. This becomes a negative listing on your credit record. You’re considered in arrears even if your payment is only one day late, so it’s imperative that you always make payments on or before their due date.
Usually, when you’re in arrears, you’re not yet subject to any legal action against you. If this is the case, you need to contact your credit provider to acknowledge that you’re in arrears, and make arrangements to settle any outstanding balance on your account. You could incur a late payment fine, but it’s in your best interest to settle your account before it’s handed to an attorney.
Falling into arrears on big assets, like your car, puts you at risk of having your assets seized - so if you’re in financial trouble, you need to alert your credit provider immediately to negotiate new payment terms.
What is a Default?
If you’re constantly in arrears, your account will be handed over to an attorney. This is called a default. You’re most likely to receive a default listing from institutions such as:
- Financial institutions (e.g. banks or insurers)
- Medical practitioners (e.g. doctors or hospitals)
- Retail outlets (e.g. clothing or furniture stores)
Defaults remain against your name for up to three years from the date the debt is settled. A default will generally read “handed over” or “written off” on your credit report.
Certain defaults can be removed from your credit history as soon as the debt is settled in full, however any institution which is a member of the Consumer Credit Association will not remove the listing, even after the debt is settled, until the three year period is reached.
What is a judgement?
A judgement is a court order that forces you to pay any outstanding debt to your creditors. Once you have paid your outstanding debt in full, you can apply to have your court order rescinded (removed from your record), however, many financial providers won’t allow this. Instead, your record will be updated to read “paid in full” and the judgement will remain listed on your credit history for five years from the date of settling your debt.
What is a sequestration order?
If you still don’t settle your debt after receiving a judgement, your creditors can apply for a sequestration order. A sequestration order is granted by the high court when you’re unable to pay your debts (insolvent). If a creditor is granted a sequestration order, then the court will appoint a trustee who will auction your assets, turning them into liquid cash which will be distributed amongst your creditors to settle as much of your debt as possible.
A sequestration order remains valid for ten years - so if you acquire any new assets during this period, they will automatically be sequestrated to pay any debt that is still outstanding. Once your debt is paid in full, you can apply for early rehabilitation. Rehabilitation listings remain on your credit record for five years from the date of your rehabilitation.
If you haven’t been rehabilitated within the ten year sequestration period, you’re automatically rehabilitated.
What can I do if I can’t pay off my debt, and have no assets which can be sequestrated?
Administration orderIf you’re debt is less than R50 000, and you don’t own any property or large assets which can be sold to pay your debt, you are eligible to apply for an administration order. This will temporarily protect you from acquiring any further judgements from your creditors.
The court will assess your financial situation, and determine how much you need for basic necessities (e.g. food and rent). Whatever is left, over and above the basics, must be paid to an administrator who will make payments to your creditors every third month. An administration order will be listed on your credit record for the entire duration that you are under administration, and will remain listed for a further five years from the date of completion.
There is a considerable fee involved to apply for an administration order, and you should consult your attorney before opting to go this route.
Debt counsellingIf you don’t qualify for an administration order, you could apply for debt counselling. In order to qualify for debt counselling, you need to be considered over-indebted in terms of the National Credit Act (No. 34 of 2005). To be considered as over-indebted, you need to be able to prove that there is absolutely no way that you are able to afford even the minimum payment on your monthly instalments.
Unlike an administration order, debt counselling does not protect you from any further legal action taken by your creditors. However, you will be protected from any further indebtedness - a limit will be placed on interest and collection fees, which will protect you from being exploited by creditors. During the duration of your debt counselling, you will not be allowed to apply for any credit until all of your existing debt is paid in full.
Just like an administration order, there are fees involved in debt counselling, and you should consult your attorney before opting to go this route.
Bad debt is not a life-sentence, you can and will get out of debt by making small, positive changes to your budget. Unfortunately there’s no simple “quick fix” to being blacklisted. The only way to recover is to start managing your debt as soon as possible. You can refer to our article, How to improve your credit rating, for a list of credit bureaus that can provide you with a free copy of your credit record, and other tips to help you manage your debt.