In this two-part series Michael Bouchier looks at how you can avoid making the 11 most common credit mistakes. Before continuing, click here for Part 1 in which Michael discusses credit mistakes one through five.

Without further adieu, credit mistakes six through 11…

1. Keeping unutilized 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 R6000 of this facility (your balance on your credit card is R6000) 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 percent 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 R6000 or R8000.

2. 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 your credit score will lose.

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

3. Not understanding that there are two 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.

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

   The National Credit Act came into full operation 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 for 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 an attorney for advice.

5. 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 five years. It can, however, be removed before this time by making application to the court to rescind (reverse) the judgment. This application would typically be made through an attorney.

   Some people who have not settled the debt that underlies the judgment simply wait for the five year period to expire, thinking that the issue will go away. This is not the case. A judgment is an order of the 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 record.

6. 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 have a question or comment for Michael Bouchier, email him here or visit www.credithealth.co.za.

Click here to read part one of this series...

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