Debt Review & Your Credit Score
How credit worthy are you?
How much credit should you be given?
What rate should you be given credit from a credit provider?
Will you actually repay your debts?
These are questions that credit providers want the answers to, and that credit bureaus share in credit reports about you. This info is also quickly reflected in what is called your credit score.
Can You Be Trusted?
When you rock up at a credit provider and ask them to give you credit, it is hard for credit providers to take you at your word when they ask you about your current debt situation.
This is because most people who ask for new credit, already owe money to other people.
This is one reason credit bureaus came into existence, so they track how much debt you have, as well as how good you are at repaying your debt.
Credit bureaus sell this information to credit providers who are thinking of giving you credit so that they can make more informed decisions about you.
What is a Credit Report?
A credit report is a document provided by a credit bureau with compiled information about you, everything from your recent employment and home address to who you owe money to and how regularly you make repayments.
A credit report is a snapshot of your recent credit usage.
What is a Credit Score?
A credit score is essentially a numerical representation of your credit-worthiness, indicating your likelihood of repaying your debts on time.
A credit score is normally a three digit number, calculated on your credit history, payment history, and credit utilization.
For most people, it ranges between 300 and 850 (in most countries) with a higher score basically saying to credit providers that you are better at repaying credit and handle debt well.
In most cases the higher your credit score, the easier it is to obtain loans and other financial services, at a better interest rate.
Getting Credit In SA
In South Africa, people have a right to apply for credit and not be discriminated against based on racial or social background.
Credit providers who turn you down for credit, could be asked to explain in writing the reason they turned you down.
The key factor on whether you can get credit or not is not your credit score or what is recorded in your credit report, but whether or not you can really afford the credit you are asking for.
If you cannot realistically afford to repay the credit each month, then a credit provider is not allowed to give you credit, as they would be acting recklessly (which happens to be illegal).
To check if you can afford the credit you are asking for, a credit provider will ask for proof of what your household income is, and will also look at your other debt obligations. This is where your credit report and your credit score comes in.
Who Makes These Credit Scores?
Credit bureaus or credit reporting agencies make credit scores.
They have common rules used by bureaus around the world, but tweaked for the local market.
These bureaus collect and analyse data from various sources, including banks, credit providers, and retailers, to generate credit reports and scores.
In South Africa, there are four main credit bureaus:
They are by no means the only ones and there are, so far, 54 bureaus registered with the NCR (in 2023) who might have information about you.
What is a Good Credit Score?
In South Africa all four major credit bureaus (Experian, TransUnion, XDS, and Compuscan) use the same credit scoring system known as the FICO scoring model.
The FICO scoring model is widely used by credit bureaus and lenders around the world, and is often seen as the global standard.
FICO scores range between 300 and 850 and are calculated based on factors such as payment history, credit use, how long you have had access to the credit, credit mix, and recent credit applications.
While each credit bureau may collect and report slightly different data about the same person, the big ones all use the same FICO scoring model to generate credit scores.
A credit score of 750 or above is considered ‘excellent’ and can help you qualify for better loan terms and credit card rewards.
Of course, these days with almost half of all credit users being in serious debt trouble and having missed payments, the majority of people usually have a much lower score.
How Can you improve Your Credit Score?
Several things can improve your credit score, including paying your bills on time, reducing how much credit you use, and keeping your credit accounts open for a longer time.
If you have a decent mix of different types of credit and pay them regularly, this can boost your score.
If you are able to use your credit and repay the full amount each month, this is a good thing.
Avoiding frequent credit applications can also boost your credit score (because you look less desperate).
Debt Counsellor Roger Brown of Credit Matters says that “Consumers can dispute information that looks incorrect on their credit report with the credit bureaus…sorting out any mistakes there can help improve your score”.
What Makes Your Credit Score Worse?
It might surprise you to learn that not having any credit accounts does not mean you will have a good score.
In fact, because credit providers don’t know how you handle credit, it could result in a very low credit score. Credit scores can be 0 for those with no credit history or usage.
It seems unfair but that’s how it works.
Several other factors can negatively affect your credit score. The biggest being missing debt repayments. Credit providers don’t like that, and if you have been missing payments this will really knock your score down.
Paying less than the agreed monthly debt repayment amount, or even paying the full required amount a few days later than you said you would, can drop your score.
Having fully maxed out accounts (or using most of your available credit) is also something that negatively effects your score.
Ironically, closing credit accounts is also something that can lower your credit score.
Keep in mind that when you run around asking lots of different people for credit within a short time, it can also make your credit score drop.
Debt Review & Your Credit Score
If you have needed to start the debt review process, then your credit score was probably not looking good, because you were probably in debt distress.
This would have been reflected in your credit score and report.
Maybe you had lots of missed payments or late payments or partial payments. You might have maxed out some of your credit accounts and credit providers might have been turning down your new applications for more credit.
With that as your starting point, debt review doesn’t hurt your credit score or credit worthiness (since no one wants to give you credit anyway) in any significant way.
But what does happen?
When you apply for debt review and debt restructuring, the Debt Counsellor lets the NCR know you have started the process and they, in turn, notify the credit bureaus (via a computer system).
During the time you are in debt review, credit bureaus will put a small indicator in place (often called a flag) to tell credit providers that you are getting rid of your debt, not taking on more debt.
‘During the time you are in debt review, credit bureaus will put a small indicator in place …to tell credit providers that you are getting rid of your debt’
Credit providers will not be quick to offer you credit, as this could be seen as ‘reckless’, which is illegal, and can land them in hot water with the National Credit Regular (NCR) and even facing fines of R1 million and hurt the value of their shares.
So, in many ways, your credit score doesn’t matter while you are in debt review. It will, however, be something that you may want to improve after you finish debt review, if you are thinking of using credit again in the future.
Debt Counsellor Roger Brown, points to this reality when he says: “it doesn’t matter…until it does”.
Building Your Credit Score after Debt Review
Brown says that these days the credit bureaus are better than ever in featuring correct information, “things really improved with the introduction of the National Credit Act”.
He explains that: “When a consumer successfully ends debt review, we notify the NCR, who in turn notify the credit bureaus and the debt review flag is then totally removed from the consumer’s credit report”.
It is always a good idea to draw a credit report a short while after your debt review ends to see what it shows. If you see any record of the debt review, then your Debt Counsellor can help by following up with the NCR and credit bureau, or you can lodge a complaint and force the credit bureau to update their records.
NOTE: If you drop out of debt review before it is finished, then the flag remains in place until you pay off all your debts. The record of your failed debt review may prevent you from getting new credit until you sort out all your existing debt.
At the end of your debt review, you will probably have closed many of your former accounts, and have no more debts so your credit score may look a bit weak. You may want to start to rebuild your credit score.
Your Score And The Rate You Get
As mentioned before, if you can afford to pay for credit, then you should be able to get credit, regardless of what your credit history looks like.
If you were in debt review but paid up all your debts then you will be able to get credit again.
Your credit score, however, will very much influence what kind of rate you get on the new credit you apply for. A low score will probably mean a higher rate. And the interest portion of credit is always the part that hurts and really costs you money over time.
So, having a better score can be beneficial if you do want to make use of credit.
Getting Back In the Game
If you intend to make use of credit to buy something, perhaps something big like a house or a car, then it can be beneficial to build up your score in order to get a better interest rate.
In such cases, it may be beneficial to pre-emptively start rebuilding a credit history. You could do this by taking out a small loan or applying for a credit card and making regular payments on time each month to establish a positive credit history, which will increase your credit score over time.
‘you can use some of the lessons you learned during your debt review’
When using credit, it is always good to “behave” yourself and be responsible. As a bonus you can use some of the lessons you learned during your debt review.
When you do get back into the credit usage game, focus on paying your monthly instalments on time. Avoid maxing out your available credit. Keep a little mix of different types of accounts and be sure to pay the full amount that you agreed to. This will help keep your credit score high.