Find out everything you need to know about your credit record when applying for car finance. Understand the difference between blacklisting, judgements and defaults, and why it’s important to keep your credit record clean - as well as some handy tips on how to check your credit score and keep it in top shape!
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.
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).
Can you buy a car once you’ve been blacklisted?
The National Credit Act 34 of 2005 prevents financial institutions from giving credit to individuals who are considered to be financially over-indebted. Any registered financial institution that approves a loan to someone who’s over-indebted, is at risk of being charged with reckless lending, and could face millions of Rands in fines.
However, each case is unique. 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 a disreputable financial provider. This is extremely dangerous. If you don’t qualify for car finance, rather consider an alternate method of buying a car - like a rent to own option.
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 you to be blacklisted.
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” said Wikus Olivier from Debt Safe, a South African debt counselling service.
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.
Myth: Checking your credit score will affect your credit rating
This is definitely not true. In South Africa, the National Credit Act 34 of 2005 states that you’re legally entitled to request a free credit report annually. It’s recommended that you take advantage of this, and request your annual credit report - regardless of whether or not you’re about to make a big purchase, just to keep your finger on the pulse of your credit score.
How to check your credit record
Simply contact your preferred credit bureau and request a credit report.
Some institutions that offer a free credit report include:
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.
Tips to help you keep your credit record clean
Check your credit report with a fine toothed comb
Discrepancies can and do happen. Make sure that all the accounts listed under your name do in fact belong to you and that details (like your ID number) are listed correctly. If you find a mistake, try to obtain a copy of your report from at least two other agencies. Compare all three reports to determine whether the error exists on all of them. If it does, you’ll need to dispute this with the credit bureaus to clear your name. Remember to keep following up until your report is correct.
Make sure all doctors bills are paid in full
Unpaid medical bills are the leading cause of negative credit records. This is because patients rely on medical aid schemes to take care of their bills and are often unaware of outstanding amounts until they receive a legal letter.
Don’t open lots of accounts in close succession
Opening several accounts in the same month could flag you as a high risk debtor.
Only open an account if you know you can afford the repayments
Do a budgeting exercise each month to ensure that you know what you can afford to spend before making any purchases on credit. Your credit repayments should never exceed 30% of your monthly income. Aim to keep your credit repayments at below 20% of your monthly income.
If you suddenly find yourself in financial trouble, alert your creditors
You’re unable to predict unfortunate circumstances like retrenchments or illness, and your creditors are aware of this. If you do find yourself in unfortunate circumstances, contact your creditors immediately. Your creditors don’t gain anything by having to blacklist you and are usually willing to negotiate new payment terms that allow you to honour your debt. Make sure that all new agreements are documented in writing, and ensure that you don’t default on the new repayment plan.
If you’ve run into financial trouble, don’t run up any more debt!
Make sure you pay off everything you already owe before taking out any further loans.
A small balance looks better than a zero balance
This might sound counterproductive, but having a small outstanding balance on an account shows potential creditors that you’re able to manage your accounts responsibly.
Don’t overextend yourself
Whilst a small outstanding balance on an account can be helpful, having ten different accounts all with outstanding balances can raise a red flag to financial institutions. Try to limit yourself to just one or two accounts and make sure you keep the balances as low as possible by making regular, monthly payments.
Don’t max out your credit card or overdraft limit
If your credit card is constantly maxed out, you have overextended yourself.
Late payments decrease your credit rating
Pay your accounts on or before their due date. This will increase your credit rating and reflect positively on your credit history. This applies to all accounts, from retail accounts, to credit cards, personal loans, bond repayments and car finance. Every overdue payment slowly chips away at your credit score, and will result in defaults, judgement and ultimately blacklistings.
Review your accounts constantly
If you have any mismanaged accounts with overdue amounts on them, make sure that you re-establish regular, timely payments on these accounts. This will slowly start to build up your credit rating again.
Don’t ignore legal letters
If you’ve received a legal letter from a creditor, address it immediately!
Got your eye on a brand new set of wheels? Download this guide on Questions to ask your dealer to help you navigate the various questions you could ask your dealer that will help make the process easier to manage.
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 your 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.
If 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.
Disclaimer: While we have made every effort to ensure that the information in this article is accurate, this article does not constitute financial advice. If you are concerned that you are in danger of being blacklisted or have outstanding defaults or judgements against you, we strongly recommend that you contact a professional financial advisor for advice.
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