A great credit score depends mostly on the status of your debt as shown in your credit report.
Getting your score to be “Good” or even “Excellent”, will require you to avoid and/or address any negative debt statuses in your report. When reviewing your credit report, you should be on the lookout for the following red flags:
- Late payments on accounts
- Defaults (non-payments)
These have the greatest negative impact on your score and fixing them will go a long way to improving your credit score. In the sections below, we explain what each of these mean, and what you can do to rectify the situation.
What is a late payment?
The payment profile section in your credit report, shows all credit accounts listed with the credit bureau including a 24-month payment history for each account. If you miss one or more payments on any of your accounts, this will be reflected as a late payment status for that particular month and that account.
The late payment status will also show how late the payment was, ranging from 30 days through to 60, 90, 120 and even 150+ days. Unless this is factually incorrect, in which case this can be disputed with the credit bureau, there is not much that can be done for historically listed late payments.
How to avoid late payment statuses on your report
It is possible to avoid repetitive late payment statuses on your credit report. Yes, even if you are unable to meet your account payment obligations. Communication, communication, communication. Contact your credit provider and enter into a payment arrangement. Should they agree, you will be required to agree and commit to an alternative payment arrangement. If you meet these new payment obligations your account history going forward will not reflect late payment statuses.
What is a default? A default will be listed on your credit report when a credit provider starts the process to enforce their rights, by taking action against you because of late payment or non-payments of an account over an average period of three to six months
When and how a credit provider takes action against you, will depend on your terms of agreement with the credit provider. In terms of the National Credit Act, a credit provider must give you 20 days’ written notice warning you that your default will be reported to the credit bureau.
If you have not received notification, you can lodge a dispute with the credit bureau who is obliged to investigate this and remove the listing if it was incorrectly submitted.
A default will remain on your credit report for a maximum of 1 year or until you bring the account up to date. Paid up defaults are removed once confirmation of paid up status is received from the credit provider. If you settle the total outstanding amount to a creditor you should see “fully paid consequent to listing” on your credit report and after two years, it will no longer be reflected in your report.
How to avoid a default status on your credit report: Because a default can haunt your credit report for two years, it is very important to avoid them at all cost! Don’t wait! Communicate and negotiate new terms with your credit provider.
What is a notice? Notices include administration orders, provisional and final sequestration, and rehabilitation orders. Once you have become subject to any of these processes you will have to be formally rehabilitated before you can enter into legal agreements unassisted again. This will normally remain on your report for 5 years.
How to deal with notices: Do not ignore them! Communicate and renegotiate! If you don’t, your access to credit will be limited.
What is a judgment?
When you fall behind with your account payments and fail to respond to reminder letters, or if you don’t stick to your payment arrangement, the credit provider can issue a summons and obtain a judgment against you. Once you have a judgment listed in your credit report, any access to new credit will be denied outright. A judgment remains on your credit report for 5 years or until your account is paid in full.
If you receive a summons and don’t take any action to defend the summons, or contact the credit provider to make an arrangement, a judgment can be taken in your absence. This is known as a default judgement. It is therefore important not to avoid your credit provider but to rather try and take proactive steps to make alternative arrangements.
Going under debt review
Debt review is a legal process that was introduced with the National Credit Act. It allows over-indebted consumers with a means to hang onto their assets and protect themselves from legal action by credit providers while they enter into an affordable payment agreement to settle their debts. The process is facilitated by a registered debt counsellor and the payment plan will become a court order.
It might sound like the ideal solution to an unmanageable debt situation, however, it’s important to realise that there are also serious implications to debt counselling. Firstly, it will cost you. Although the application fee for debt counselling is nominal, there are fees that will be worked into your payment restructuring. Debt counsellors are under legal obligation to disclose the full cost of debt restructuring upfront. It’s important to shop around as not all debt counsellors fees are the same. Importantly, it will also impact your credit rating. You will be listed at all credit bureaus as being under debt review, and you will not be able to access any form of additional credit until you have paid up your restructured debt and are issued with a clearance certificate. It’s also vital to ensure that the debt counsellor you choose is registered with the National Credit Regulator. If you choose an unregistered counsellor you may not be protected by law. To find a registered debt counsellor and learn more about the debt review process visit the National Credit Regulator website.
The best approach to a great credit score is well-managed debt. However, if you find yourself falling behind on your payments, it is key to address the problem sooner, rather than later. Avoiding credit providers is the worst approach. In general, the longer the debt is outstanding the more severe the impact on your credit score and the harder it gets to fix the problem. Therefore the key to managing and settling your debt is knowing and understanding your status as reflected in your credit report, talking to the credit providers where you have any of the debt red flags, and making and sticking to a plan to fix these issues.