Repairing your credit record after debt review

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Vee writes:

Is it possible to improve your credit record after debt review without taking on new debt?

Hannalie Crous, head of retail credit at FNB replies:

It is important to note that a bank will consider the fact that you were under debt review as a positive rather than a negative move because you took action when you realised you were not managing your debts.

The best option would be to avoid taking on any more debt after being cleared. Credit providers will view this in a positive light because it reflects that you are fully rehabilitated and are able to manage your financial affairs in a responsible manner.

The credit bureau’s records reflect payment behaviour on credit-related agreements, which include cellphone services, insurance and DStv subscriptions.

So, having a product such as a cellphone contract or insurance policy, and paying the monthly amounts owed on time and in full, will enable you to build up a positive payment profile at the credit bureau without taking on debt.

Payment profiles established through the phone contract and insurance agreements should enable you to re-establish a positive profile. It is always better to save if you want to buy more expensive, durable items. Credit should ideally only be used to acquire assets such as a home.

If you decide to take on a credit card or store card to build up a favourable credit record, you could consider a small credit limit on the card and ensure the full outstanding amount is paid up in full each month, thus leaving no debit balance.

This will in effect establish a payment pattern that credit providers can take into account without the consumer incurring outstanding debt.

However, it is important that you manage this arrangement carefully and stick to the principle of not taking on more credit and, therefore, do not fall back into a situation where you become reliant on credit.

How to exit debt review

Charles asks:

How do I exit debt review now that I can sustain my finances?

Benay Sager, chief operating officer at IDM Group, replies:

One way to exit debt review is to settle all outstanding debt. Pay all outstanding debt owed to your credit providers (except a home loan, which is considered a long-term agreement), request paid-up letters, and ask the debt counsellor to issue a clearance certificate.

This scenario only works if there is no home loan or if the home loan is not in arrears in terms of repayments.

Once all paid-up letters are supplied to the debt counsellor, you will be issued with a clearance certificate.

The debt counsellor will then ask the National Credit Regulator to move you to the appropriate code so that the status of “no longer in debt review” is reflected at the credit bureaus.

Another way is to rescind the existing debt review court order or obtain a court order declaring that you are no longer overindebted.

If you do not have a debt review court order, you can go to court based on the grounds of “improved financial situation” at any point in the debt review process to declare yourself no longer overindebted.

This will require proof of the improved financial situation – for example, a salary increase or a lump sum amount received.

The burden of proof rests solely on you to demonstrate that you are no longer overindebted.

If you successfully declare yourself no longer overindebted, you will once again be liable to pay your credit providers back.

Your debt counsellor will then ask the National Credit Regulator to move you to the appropriate code so that the status of “consumer has obtained court order declaring him/her no longer overindebted” is reflected at the credit bureaus.

If you underwent debt counselling and negotiated rates were implemented with creditors during this process, it is important to remember that, after being declared no longer overindebted, the repayments will most likely return to the payment amount owed before the negotiations took place.


Solomon writes:

I am a foreigner studying in South Africa and I have a study permit. Is it possible to open an investment account with a financial institution such as Old Mutual?

Old Mutual replies:

A foreign investor can invest in various Old Mutual products. Financial Intelligence Centre Act (Fica) and Foreign Account Tax Compliance Act (Fatca) rules and processes will apply.

For Fica, you will need to provide a copy of a valid passport. Copies of one of the following documents that are less than three months old will be considered for proof of address:

. Utility bill;

. Retail account;

. Bank account statement;

. Municipal rates and taxes invoice;

. Mortgage statement from a bank or other recognised lending institution;

. Telkom account; and

. Cellphone account.

In terms of Fatca, if the client is a US citizen, non-US financial institutions will be required to identify and report on US individuals or entity account holders to obtain tax residency details of the investor.

More details regarding Fatca can be found online.

Julius asks:

Are there any institutions that offer a personal loan that can be backed by my pension? I have a retirement annuity with Allan Gray that I would like to use.

City Press replies:

In some cases, you can use your pension as security for a mortgage, but not for a personal loan. It is usually done through your employer fund, not your personal retirement annuity.

In terms of the Pension Funds Act, a pension fund is allowed to lend a member an amount of money for the purposes of purchasing or renovating their home.

Although it is allowed, not all pension funds provide this benefit, which would need to form part of the pension fund rules, so you would need to obtain a copy of the registered rules of your fund from the trustees of the fund.

The pension fund can either lend the money directly or, as is commonly the case, can issue a guarantee to the credit provider. Usually, the pension fund will work with a specific bank to offer the benefit to its members.

The amount of money that can be lent to the member or that can be used as security for a pension-backed home loan is limited by the Pension Funds Act to 90% of your retirement funds, however, individual funds have their own limits. For example, the Financial Services Board’s own pension fund rules limit the amount their employees can borrow to 60% of their pension fund assets. The Pension Funds Act further requires that the home loan or pensions-backed home loan be paid back in full within 30 years or before the client reaches retirement age.

Banks usually offer a specialist product to cater for pension-backed home loans, and the monthly instalments are deducted from the employee’s salary each month by the employer. The employer would also consider the affordability of the loan before approving it.

Ryan writes:

I want to start a fund for emergencies and do not intend to use money in this fund for any other purpose.

What is the best type of investment/savings vehicle for such a fund when balancing above-inflation growth with ease of access?

City Press replies:

The problem with emergencies is that you never know when you will need the money, so you cannot afford to put it in a higher-growth investment that may have shorter-term volatility.

You could, however, consider splitting the money into two “pots”.

Ideally, you should have at least three months’ worth of expenses saved in an emergency fund, but this amount of money is most likely only going to be required if you lose your job.

Most emergencies are for day-to-day events such as unexpected vehicle repairs or a medical emergency.

You could keep one month’s worth of expenses in a relatively high-interest savings account linked to your bank account for easy access, and then either invest the remaining two months’ worth into your mortgage or a low-risk income fund that aims to deliver one percentage point above inflation.

Seraki writes:

I took out a personal loan with a bank and it added credit insurance to my loan. I informed the person who assisted me that I already have life cover, which I could use for the loan.

She said there was nothing she could do because it is the bank’s procedure to add credit insurance. Is this correct or has the credit insurance been unfairly or unlawfully added to my loan?

Lesiba Mashapa of the National Credit Regulator replies:

The consumer has an existing right in the National Credit Act to look for another insurer at the point of the loan origination. He can cede an existing policy, but must ensure that it provides the minimum cover and benefits equivalent to those in the regulations.

We amplified this right in the credit life insurance regulations to also apply after the conclusion of the credit agreement.

Sello writes:

I would like to take up a rent-to-buy option without going through a bank. Is this possible?

City Press replies:

The idea behind the rent-to-buy option is that it offers consumers an opportunity to prove their ability to afford a home before buying. For example, if you made an offer to purchase a home and your mortgage was declined due to your credit record, you could apply for an option to buy the property at a later date – once your credit record is repaired – and rent the property in the meantime.

You in effect fix the price of the property and the option period can be anywhere from six to 24 months.

The agreement is done through a company called Rent2Buy (rent2buy.co.za).

During the rental period, you will pay rent equivalent to the mortgage instalment, which would demonstrate that you can afford the instalments and thereby improve your chance of receiving a mortgage.

This amount would be higher than the actual rent, and the additional amount could be transferred back to the purchaser to use as a deposit when applying for the mortgage.

Rent2Buy uses the following example: if the property price is R500 000, the average rent charged would be 0.6% a month of the value of the property, or R3 000. Within the rent-to-buy option, the tenant would pay 1% a month, or R5 000. The additional amount of R2 000 is credited as a deposit for the benefit of the purchaser once the transfer takes place. Over 12 months, this would amount to R24 000.

The downside is that there are fees to pay, which include a rental deposit of one to three months depending on your credit profile. You will also pay a rental insurance premium of 2.5% of the rent, plus a R50 admin fee each month. This would add R175 a month to the above example.

You will still need to apply to the bank for a mortgage once you are in a position to buy the property.

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