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Debt TRAP: Seven tips to avoid financial woes this festive season

Credit Ombudsman, Howard Gabriels, advises consumers how to get the best price when applying for credit and how to avoid the debt trap.

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As we approach the festive season it’s  important to avoid the pitfalls of the debt trap and to avoid becoming over-indebted when applying for credit. 

The National Credit Act (NCA) gives direction to credit providers when it comes to over-indebtedness and reckless lending. 

When a consumer applies for credit, there are guidelines which the credit provider should follow to secure them from lending money or providing credit recklessly to consumers.

Over-indebtedness occurs when a consumer is in a debt trap and over committed financially, unable to take on more debt.

Credit Ombudsman, Howard Gabriels, offers consumers the following checklist to consider before applying for credit in order to avoid falling into the debt trap this festive season.

Know your rights under the law and avoid the debt trap

  1. Ask yourself whether your purchase is a need or a want? Credit is a tool meant to assist in advancing in one’s life. Ideally, we would purchase everything with cash, however, for big purchases such as cars and houses, we need the assistance of a credit provider. Therefore, before you go and apply for credit, ask yourself whether you need to make the purchase on credit or whether it is a want. At times what we want can wait, so you can either save up for the item you want or get it on lay-by. If you need to, draw up and list of pros and cons, and then make your decision. Never take on debt if you don’t have a plan for how you intend to pay it back. 
  2. Affordability: Credit providers are required to do an affordability assessment for every consumer who applies for credit. Do your own assessment at home before approaching the credit grantor. You will be required to produce a realistic budget, in which you are honest with yourself about your spending habits. Your budget should include all your monthly expenses such school fees, debts, groceries, transport and entertainment. Get a three month bank statement to see how and where you spend your money, since your bank statement can never lie to you. Becoming your own personal accountant will help you to account for every cent spent. 
  3. Interest and other added fees: Part of affordability is knowing and understanding the interest and fees charged that make up the total cost of credit. A monthly debt instalment is inclusive of interest and added fees, which the consumer is made aware of when applying for credit. Before signing a credit agreement the credit provider has to explain the total cost of credit and total monthly instalment amount. Part of the purpose of the NCA is to promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market industry. When applying for credit shop around for a competitive interest rate and the best price possible. You are within your rights to compare these prices before making a decision to take out new credit.
  4. Cooling off periods: Prior to the conclusion of a credit agreement, consumers must be given a pre-agreement statement and quotation. The statement is a document that details the terms and conditions of the credit agreement the creditor is offering. The quotation discloses all the costs of the credit, showing the principal debt, the repayment schedule, the interest rate, other credit costs and the total cost of the proposed credit agreement. If you agree to and sign these documents, these become the credit agreement. The National Credit Act requires that credit providers must disclose and explain the total cost of credit to consumers so that they understand what they are agreeing to. What is important to note is that consumers do not have to accept the offer in the pre-agreement and quotation agreement. Consumers have up to five business days to consider the offer and can decide not to accept the offer of credit.
  5. Credit bureau profile: Consumer should check their credit profile at the credit bureau before applying for credit. The NCA allows consumer to get a free credit report from each credit bureau in a 12-month period. How does it help you to check your credit profile before applying for credit? Well, you do not want to be turned back by the credit provider due to you having a low credit score. This may even be because of an outdated account still reflecting on your credit profile. So, if you check your credit profile before you go and apply for credit, you can dispute any incorrect or outdated information with the credit bureau.                 
  6. Credit life insurance: Credit life insurance aims to protect consumers credit obligations should there be an event beyond your control where you won’t be able to earn an income. You do not have to accept the in-house insurance offered by the credit provider. Shop around to find a service provider who will offer you the best benefit. Some consumers are not even aware that they have credit life insurance. They pay monthly instalments which include credit life insurance, however, when they get retrenched and need to reap the benefit of the product, they don’t submit claims because they aren’t aware that they have the benefit. Read and understand them for your own protection.                                7.  Lastly, what is also important is to know where to go when you need help. The Credit Ombudsman’s office provides free assistance and advice with all credit bureau and credit agreement related matters. Matters include, overcharging of interest or fees, prescription of debt, reckless lending, debt collection issues, fraud, emolument attachment orders/garnishee orders, consumers unfairly or incorrectly listed at the credit bureau for judgments, and defaults.                                                                         
  7. Lodge a complaint: Consumers can file a complaint or a debt related dispute by contacting the ombudsman on 0861 662 837; sending a SMS to 44786 (free); emailing ombud@creditombud.org.za, or via the website www.creditombud.org,za