HELP – My Credit Score Has Been Negatively Affected by COVID-19
If COVID-19 has negatively impacted your credit score and you are battling to secure a home loan due to this, Karis Properties has some advice that you can use to improve your score. However, a word of warning – this is not a quick process.
What is a Credit Score?
Your credit score is a number that the bank uses to determine how much of a risk you are to them in terms of your ability to be able to pay back the loan. In calculating this number, the credit bureau takes into consideration your record of debt repayments and provides your bank with a three-digit number ranging from 0 – 999. The higher number equates to a better credit rating and will allow the bank to determine how much of a risk they can afford to take when it comes to providing you with a loan and an interest rate.
What Counts Towards a Good Credit Score?
Pre-COVID-19, when credit bureaus calculate your rate of debt repayment performance, they looked at the following indicators;
- Your total outstanding debts.
- What type of credit you applied for.
- How often you have applied for loans in the past.
- How long your bank accounts have been open.
- How much credit you are currently using.
- Any liquidation, insolvency, bankruptcy or judgements against you.
- Your employment history.
Although the above are still important considerations, they also now take into account which company you are working for to determine the risks of the current pandemic against your job security.
How Can I Improve My Credit Rating?
It may still be possible to buy a house with a bad credit rating, but it is highly likely that your loan amount and interest rate will be unfavourable. Therefore, you will need to focus on improving your credit score, which is relatively simple – although not an overnight process – with some financial discipline.
Initial quick fixes, if your rating is not too poor, include;
- Bringing any revolving credit balances down to less than 30% of the total debt.
- Ensuring that all other payments are up to date.
- If there are any collections against your name, you must have these removed.
If you have already done the above and your credit rating is still poor, then you can take the following steps;
- Don’t owe more than 30% of your income.
- Continue paying your accounts on time and in full.
- If possible, pay more than the minimum monthly payment required.
- Reduce your credit limits as much as possible, only using it in emergencies.
- Try not to use more than 30% of your credit.
- Try to avoid revolving credit as it usually attracts high-interest rates.
- Although it is advised to reduce your debt, having a monthly store account allows credit bureaus to assess your risk.
- Make sure that you do not apply for more than one loan at a time. The impact of this is that lenders will view your financial status as being on shaky ground.
Communication is key. If you are unable to pay the amounts due, contact your creditor to make an arrangement to pay off less over a more extended period. This is quite an acceptable practice, and one that finance departments appreciate.
What Must I Do If I Have Been Blacklisted?
If you have been blacklisted with the credit bureau, i.e. you have failed to make payments and did not arrange to pay off the existing debt, then your chances of obtaining a loan are nil.
You will first need to pay off your debt in full, together with the interest and then apply for your name to be cleared. Although a blacklisting should automatically be removed a year after you settled the debt, you may need to check. If it still exists, then you will need to institute a dispute resolution with the National Credit Regulator (www.ncr.org.za).
What is the National Credit Regulator (NCR)
The NCR was established by the South African Government to promote the development of accessible credit, specifically to historically disadvantaged persons. Its tasks also include educating, researching, developing policies, investigating complaints and ensuring the enforcement of the National Credit Act 34 of 2005.
Get Financially Fit
Take stock of your financial situation by downloading your latest credit report. This will give you an indication of exactly how much is needed to pay off your debts so that you can design your budget around this. Our current lockdown lifestyle has a financial advantage as it is the ideal opportunity to cut costs in terms of expenses for petrol, restaurants, gym, holidays, etc. Use the money that you would have spent on these things to pay off your debts or pay it into a savings account for a deposit on your new home.
You may need to wait for a year to improve your credit score, but it will quickly pass and be worth it at the end, resulting in far less financial stress.
Many thousands of South Africans have had their incomes cut or are being retrenched due to the severe impact that COVID-19 has had and is having on our economy. This has resulted in defaults on premiums and cancellations of existing insurance policies, both of which can harm your credit score. More severe and negative impacts on consumer credit ratings are expected to continue over the next couple of months.
It is important to accept that life is not going to go back to normal very soon. The impact of this pandemic will be around for a very long time. By taking charge of your finances now, you will be setting the stage to enjoy your life after lockdown.
A Final Word
The Banking Association of South Africa (BASA) has agreed to do all that they can, within the relevant regulatory frameworks, to responsibly support their customers and preserve the safety and soundness of our financial system. If you are in good standing with your bank but are experiencing financial challenges as a result of COVID-19, then you should contact your bank who will, on a case-by-case basis, assist you with an appropriate solution.