A Fin24 user looks to an expert for help in improving his credit score by paying off his debt.
He writes: I have a number of loans that I need to tackle as they are giving me a low credit score...how can I go about dealing with them, especially when some are around R100 000?
- Capitec - R100 000
- SA Home loans - R35 000
- Absa Vehicle - R100 000
- Lewis - R8 000
- ABSA loan - R9 500
Mark Bishop, Managing Member at Credit Clear responds:
Thank you for your question.
In order to get credit, a consumer must have a credit history, as a consumer’s credit score is determined by their behaviour in maintaining the credit.
It would be essential to ascertain the status of the accounts in question; however, as this information is not at hand, we are going to provide an assumed strategy of how the debt can be expunged to increase the consumer’s credit score.
We find that the best solution for getting a client financially free, is to start with obliterating the smaller accounts, working towards paying higher instalments or settlements on larger accounts. This is commonly known as the snowball effect. As smaller accounts are paid in full, the instalments can be increased on other accounts, thereby ensuring that the client eradicates their debt sooner. There is a perception by some experts that one should rather tackle accounts with the higher interest rates first; however, we remain of the view that our strategy produces better results over a shorter period.
Let us assume that the consumer in question earns a monthly net salary of R40 000 and has living expenses of approximately R20 000 per month. This would mean that they have a surplus of around R20 000 per month to pay towards loans, credit cards, retail accounts, etc.
Our strategy is detailed in the table below and it sets out how our formula works and how the consumer’s credit score will increase over a 6-month period. The concept, whilst looking complicated, is actually fairly simple.
If you look at month 1 in the table, the consumer has five accounts with a total balance due of R252 500. With the surplus of R20 000 to pay towards debt per month, the consumer was able to settle the furniture account in month 1, which would immediately increase their credit score.
Month 2 starts with an opening balance of R231 300 with only four accounts left to pay. The settlement amount paid in respect of the furniture account can now be added to the next small account, being the Bank Credit Loan, which means that in month 2, the Bank Credit Loan can settle and the instalment on the Home Loans account can be increased slightly.
In months 3 and 4, the Home Loans instalment is automatically increased and the opening balances decrease accordingly.
Month 5 has an opening balance of R169 600, and owing to the fact that the Home Loans account now has a balance of only R9 600, the consumer is able to settle same, with a discount, leaving only two accounts left to pay.
By month 6, the consumer’s debt has decreased by more than R100 000 and they are left with only the two larger accounts to be paid. The instalment paid in respect of the Vehicle HP account will now increase radically, allowing the consumer to pay this account sooner.
The consumer will now definitely see the change in their credit score by this time.
The table refers to both instalments and settlement amounts and these can be explained as follows: -
If a consumer has cash available immediately or can obtain cash over a couple of months and requires us to negotiate once-off full and final discounted settlements, we can do so. It is important to note that we cannot guarantee the settlement amounts; however, based on experience we are able to provide the below figures based on settlement percentages we have negotiated previously. We pride ourselves on our settlement negotiations and do everything in our power to attempt to obtain the lowest possible settlements for consumers.
Negotiated discounted settlements are required to be paid by way of a once-off instalment; however, we can attempt to negotiate that same be paid over a period of up to a maximum of four months for larger accounts.
It is important to note that all creditors make use of different formulas and criteria with regard to settlements. Some creditors give higher discounts on current up-to-date accounts but give lower discounts on arrears accounts and vice versa.
Monthly payment arrangements
This refers to instalments that are paid monthly towards accounts whether this is the contractual instalment, a reduced instalment or an increased instalment.
Should an account be in arrears and monthly payment arrangements are made, once arrears amounts have been paid and the account reaches the current up-to-date status, the consumer’s credit score will improve, though they are still making payments on the account.
It must also be borne in mind, however, that instalment settlements will continue to attract interest.
There are various other factors that would be considered and investigated, which could result in the consumer becoming creditworthy sooner and, in some instances, not even having to pay an account at all or paying a reduced balance. These include disputes such as in duplum (which relates to excessive interest), prescription and reckless lending.
If we successfully argue a dispute, we are able to remove an account immediately which results in the consumer’s credit score increasing.
The types of listings also have a huge impact on a consumer’s credit score. If accounts are in arrears, this will be reflected either by way of a judgment, a default or on the payment profile. A payment profile reflects the consumers payment behavior from when an account was opened until closure of the account. Judgments, defaults and poor payment profiles are negative in nature and most certainly affect the consumer’s credit score. The main aim is to have these removed and/or updated as expeditiously as possible.
Other factors that negatively impact credit scoring include but are not limited to:
- Enquiries: Every time a consumer applies for credit, a creditor will conduct a credit check on their name. Excessive enquiries give the impression that one is “fishing” for finance.
- Personal information: Large numbers of changes in employment, residence, contact numbers have a negative impact. A consumer should check the personal information on their Credit Records and lodge disputes in respect of incorrect information so that same can be removed.
- Short term/payday loans: Try to avoid these insofar as possible as constantly applying for mid-month payday loans gives the impression that you are not managing your affordability in a proper manner.
How does one improve their credit score and keep it constant, you may ask? Simply follow some of the below suggestions:-
- Pay your accounts timeously on or before the due date.
- Maintain contractual instalments and do not default on payments.
- If you can, pay more than what is due (this will also decrease the interest payable).
- Do not pay an instalment amount less than the monthly interest due.
- Ensure that creditors update the status of your account continuously.
- Ensure that when applying for new credit you are able to afford the loan to avoid having to approach various Creditors and giving the impression that you are “fishing”.
- Keep balances low on credit cards and other revolving credit accounts. (Keep credit cards in a positive balance and make use of same for emergencies only).
- Do not apply for unnecessary loans or credit.
Questions may be edited for brevity and clarity.
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