We cannot deny that things have been financially tough for so many people in recent times and with that comes the inevitable ‘Bad Debt’ clouds that loom over a large part of the population.
In my experience, the biggest problem with this is communication and not knowing how to handle it when a person falls behind on payments for an account in their name, or not taking the time to resolve a dispute with an account holder fully. The onus is on you, as the account holder, to make sure your account is paid each month, on or before the date specified. Make sure you have written confirmation that a dispute has been resolved, should you ever be unfortunate enough to have to try and convince a large corporate company that they made an error on your statement.
Communication is key. If you cannot pay on time or might only be able to pay next month, let the company know and if possible, make an arrangement. As long as you stick to the arrangement and it doesn’t take too long to get back on track it should not affect your credit profile. Most people just leave it and then carry on with payments as normal, thinking it will just go away. The reality is that all your accounts are carefully monitored by credit providers to see how you manage your debt. That gives them an indication of how you will handle their debt the day you open an account with them.
Therefor your credit profile is vital and plays a major role in the offer any bank will make when you apply for a home loan. Interest rates are often influenced heavily by people’s credit profiles, but even more so, you need to have a credit score of at least 800 to have any chance to get a 100% home loan, should you not have a deposit available when buying a house. It’s people with scores of 900 and above that qualify for the really good interest rates and high facilities of credit, within their income and affordability range, of course.
Now the question is, what if you had a bad account or arrears amount a while ago. Or even worse, a Judgement was filed against your name. Well, the fact is it doesn’t just go away when you pay the arrears or bad debt. Because all credit providers use your history of debt management to determine the risk, they are prepared to take with you, they sometime go back many years in your profile to determine if there has been any ‘black marks’. If there are, it will affect your credit application and the offer they make you. Even when the bad debt has been ‘removed’ from your name it still reflects on the systems for some time and does not just disappear.
The best thing to do is to approach a company that specialises in debt clearance and make use of their services to firstly settle all bad debt, clear as much of it from the records as possible, and assist to put you in a position where it is unlikely that you will make the same mistake again by consolidating debt, etc. These companies charge a fee but this is the only way to get ahead of your past mistakes and eventually get that clean sheet.
For home loans especially, your badly managed accounts will catch up with you and will have an influence on the outcome of your bond application. How much of an affect depends on the severity of the bad debt, and for how long it was in arrears. The steps you took to resolve the situation also is taken into consideration. That is why we place heavy emphasis on a person’s credit profile when doing a pre-qualification for a home loan and to determine what the banks will likely offer as far as LTV (Loan To Value) percentage and interest rates, which in turn determines what you will repay each month.
Bad debt is not something to be taken lightly, and can have serious consequences on your future finances. One has to have debt in order for the credit bureaus to determine your score, but managing the accounts that you have correctly is vital.
Yours in Home Loans…
Franchise Owner – Cape Town
082 926 2884 021 180 4541/2 0866 355 496