Avoiding debt does not necessarily endear you to lenders, writes Brendan Peacock

The  implementation of the National Credit Act has placed a greater obligation on individuals to manage their credit responsibly.

Since its passage, the average South African has found it a lot tougher to take out credit, as lenders apply stricter criteria to weed out bad credit risks. But what if you have always been responsible with your money and avoided credit altogether – will you look like a good or a bad risk to a potential lender?

According to Debtbusters MD Luke Hirst, the answer is not clear-cut. “Is having debt or the option to use debt always bad news? there will be times when debt is required – home loans, vehicle finance and perhaps a business loan are the obvious ones. these types of debts can be used to generate income or wealth, for instance taking out a home loan to lease out a property or requiring a vehicle to sell a product.”

When the time comes to take out these types of loans, Hirst said, you will be asked to fill in a credit application. “This application will outline your income, expenses, type of employment and whether you have other debts. The loan company will then check this along with your credit history by using a credit report. if you have not taken out debt previously, your credit report will have no activity. Historically, this was seen by the loan providers as a risk, as they do not know the type of spending and payment habits you may have.”

Hirst said this was unlikely to change. “I do believe loan providers should take education and qualifications into consideration, because if you have a degree or skill or trade, the chances of earning an income and paying your debts are considerably higher.”

Lenders don’t always see it this way. “I would therefore advise people to have a credit card because these tend to be the most useful if you need to book flights or purchase something over the internet anyway. They have a number of advantages, such as insurance and an interest-free period as long as the full balance is paid by the due date.

“The key to this is that you only need one credit card, not five or six plus personal loans and store cards. also, ensure that the full balance is paid off each month, not just the minimum charge.

“This will enable you to build a good payment profile, as well as managing your finances, meaning more rands in your pocket.”

It is this good payment profile that will give you bargaining power with lenders. “A good payment profile will mean you can negotiate better interest rates and terms, since banks want good credit risks. A reduction on your home loan or vehicle loan by 1% will have a significant positive effect on your bank balance,” said Hirst.

Marius Crook, Western Cape regional sales manager at ooba, said when it comes to applications for home loans, for example, banks run your application through a scorecard. “This scorecard takes many factors into account, such as whether you are self-employed, employed, period of employment, and so on. The scorecard immediately looks at the individual’s credit record with ITC and Transunion credit bureaus. Payments on all accounts should be up to date and also paid on time – this will give the individual more points on the scorecard. Credit providers report on a monthly basis to the credit bureaus how accounts are conducted.”

Lack of a credit record could lead to not gaining enough points. “However, should the application be declined because of that, the application can be appealed on the basis that the individual has sufficient net surplus income and no bad credit record,” said Crook.

According to Crook, prior to the National Credit Act, affordability was a simple calculation based on 30% of income. “Banks now use a combination of the 30% of gross salary and net surplus income (NSI). They will base affordability on 30% of the fixed income and ensure that after all declared expenses the NSI is less than the 30% since from that NSI one would have to service a mortgage and all future expenses associated with the new mortgage, such as rates and taxes. this means banks now review your total debt exposure plus expenses to ensure there is adequate net surplus income to service the new home loan instalment.”

Crook said banks also look more favourably at a client if they are able to commit capital to the property purchase – preferably at least a 10% cash deposit.

While a clean credit history and being up to date on all debt instalment payments are important, Crook said banks also weigh up an applicant’s current financial situation, whether that will change in the next few years and whether the applicant’s income is steady or fluctuating.

If you’re having a hard time securing credit, shop around. “According to the latest ooba statistics, 24.2% of applications in November 2011 that were declined by one lender were approved by another. Shopping around also ensures the best rate on offer,” said Crook.

If your debt repayment record exists but has been a bit shaky, the key is to repair it, said Hirst. “If you have had a couple of bad months where payment was missed, then the key is to catch up with the arrears and pay the monthly amount each and every month by due date for a period of six to 12 months, depending on the lender.”

It’s the record that makes for a good risk