The summer holidays have come and gone. With luck you got a chance to catch your breath and recharge your batteries – and set goals for 2009.
Financial freedom – getting out of debt and staying that way – probably tops most people’s lists. It is not always easy or possible, particularly in these trying economic times, but this introduction to credit might prove useful.
What is credit?
Banks and finance houses make money by offering clients a range of products and services, including credit. Credit can take many forms such as overdrafts and credit cards, incidental credit agreements, unsecured loans (personal loans), instalment agreements, bonds or secured loans or leases and credit guarantees (suretyships). For the purpose of this month’s column, I will concentrate on personal loans.
Credit applications
To qualify for credit, you must visit a registered credit provider and submit an application. The success of your application and the amount of credit granted will depend on affordability and your credit bureau information.
TransUnion and Experian, the two bureaus used by credit providers to assess credit applications, will give the credit provider your credit profile since they have a record of your credit history, which includes late payments, for example. Much of the decision to grant credit is based on information from credit bureaus, so it’s important that you manage your finances properly.
Furthermore, if you have difficulty settling your debts, you should not hesitate to contact your creditors and make an alternative arrangement so that your record is not negatively affected.
As the consumer you must provide accurate information to the credit provider – which may include a salary slip, statement of income and expenses, a household budget and details of other credit commitments – so that it can accurately assess your affordability.
It is vital that you are honest and give as much information as you can because this will ensure that you do not over-extend yourself. The consequences of borrowing more than you can afford to repay can be devastating, so it is in your best interest to be truthful and not to withhold information to secure a higher amount of credit.
Processing your application
You will get access to the funds once your application has been approved. This can take anything from a week to a couple of minutes, depending on the credit provider. These funds (the personal loan or credit) must be repaid within the agreed period and will include the original capital amount plus the interest and fees.
Ensure that you get a pre-agreement containing the main features of the proposed agreement and a quotation of all the associated costs before entering into any formal credit agreement. This agreement is binding on the credit provider for five days, so you have an opportunity to shop around for the best deal.
Shopping for credit
As with any financial product or service, it pays to shop around so you can get the best price to suit your individual needs. What you should know, however, is that unnecessarily shopping for credit could cause you more harm than good because it affects your credit profile.
Every time you apply for credit, a bureau inquiry is created on your credit record. Too many inquiries could have a negative effect on your record, so be selective about where and when you apply for credit. Never apply simply for the sake of it.
National Credit Act
The National Credit Act, or NCA, was passed by Parliament and came into effect in June 2007. The NCA aims to control and regulate all credit transactions, including all aspects of the industry, such as marketing and advertising.
Consumers enjoy more protection because the NCA prevents exploitation. There are many unregulated credit providers operating illegally and imposing unfair terms and conditions and there is little in the way of protection for consumers who choose this route. Protect yourself by using registered credit providers only.
Through the NCA, you can enjoy consumer rights, which include the right to:
Be given reasons for credit being refused or discontinued (given in writing upon request);
Information in plain and easy-to-understand language; and
Have access to and challenge credit records and information held by credit bureaus, to have incorrect records of debt adjustments removed and to be given notification before negative information is reported to the credit bureau.
Credit should not be feared when used responsibly. It is a tool that can be used in various ways to assist you. For further information, speak to an accredited financial adviser or contact a registered credit provider.