Illustration: Colin Daniel

“Most people in the United States would be able to tell you their credit score before they could tell you where Africa is,” Manie van Schalkwyk, the Credit Ombud, says. If more South Africans understood the value of a good credit report and a good credit score, they would leverage it to get the best possible deal when entering into a credit agreement, he says.

So what is a credit bureau, a credit report and a credit score?

What’s a credit bureau?

A credit bureau is a repository of data supplied by credit providers. The data provides a record of how well consumers manage their credit.

Credit bureaus compile reports on individual consumers and assign them a credit score. When you apply for credit, a credit provider will go to one or more bureaus to enquire about you, to determine whether or not to grant you credit. The objective is also to assess whether you can afford the credit.

Van Schalkwyk says anyone who has a mortgage bond, car on hire purchase, personal loan or store account has a record at one or more of the 11 credit bureaus in the country, and all of the major credit providers supply information to the bureaus.

What’s on your report?

Your credit report shows both positive and negative information about your conduct as a consumer of credit.

The negative information that could be on your report includes:

* Defaults. If you’re regularly late in paying your accounts, or if you haven’t paid an account for three or four months, you may be reported as a “persistent defaulter”. This is usually the first step before judgment is taken and this information stays on your record for two years.

* Judgments. Once a credit provider has obtained a judgment against you, it may be authorised by the court to have money deducted from your salary or repossess your possessions (such as your furniture). This information stays on your record for five years.

* Administration orders. Described as a form of insolvency, an administration order is when a court appoints an administrator to distribute on your behalf a fixed monthly amount among all of your creditors. The fact that there is an administration order against you stays on your credit record for 10 years or until the order has been rescinded.

* Sequestrations. This is a legal process whereby you are declared insolvent by court order and you surrender your estate. The effect of a sequestration order is that your debts are written off, but a trustee is appointed to sell your assets and distribute the proceeds according to the Insolvency Act. Van Schalkwyk says you are relegated to the status of a minor in that you cannot contract or receive credit. The fact that you have been sequestrated stays on your credit record for 10 years or until you have been rehabilitated (and paid all your creditors), in which case you will be seen as a “new person” and all information that led to your sequestration will be removed from your credit report. If you have been rehabilitated, this information stays on your report for five years.

* Debt counselling. If you are in debt counselling, this information will be on your credit record. Your debt counsellor negotiates with all your creditors and works out for you how to service all your debts until you are debt-free. While you’re in debt counselling you are not eligible for further credit until all your debts are paid. (If your debts include a home loan, which usually carries a 20-year term, this means you will not qualify for more credit until your home loan is paid off.)

Your credit report will also reflect “enquiries”. Each time a credit provider makes an enquiry about you – in other words, calls for your credit report – it is logged. Van Schalkwyk says this is not negative information, but it stays on your report for two years.

It’s important for you to know who is viewing your credit report, because your report is confidential, Van Schalkwyk says. Only those to whom you give permission and those with a “prescribed purpose” as defined by the National Credit Act (NCA) may view your report – and that includes prospective employers.

Van Schalkwyk says the NCA states that only candidates being considered for a position that requires trust and honesty “and entails the handling of cash or finances” can have their credit report checked. He says it makes no sense to carry out a credit check on someone who has applied for a job as a chef, for example. But Van Schalkwyk says he has heard of call centre candidates being disqualified on the basis of a poor credit record.

He says 80 percent of information held by credit bureaus is positive. But some information is inaccurate, which can have dire consequences for you as a consumer.

Free annual report

You’re entitled to a free credit report once a year from each of the credit bureaus registered by the National Credit Regulator. It’s important to check that the information on your credit report is accurate. If you find that there is incorrect information on your report, you may lodge a dispute with the credit bureau. If it’s valid, the credit bureau must remove the incorrect information.

Van Schalkwyk says if you have negative information (such as that relating to defaults, judgments, administration orders, sequestration or debt counselling) on your report, you should never use the services of any company that offers to clear your report for a fee.

It is illegal to “clear” another person’s credit report if the information is valid and correct, the ombud says. “In some instances we have found that there are syndicates behind these operators; they pay people to remove the negative information, and not long afterwards, the information reappears.”

If you have any trouble getting incorrect information removed from your report, contact the office of the Credit Ombud where you will get help at no cost, Van Schalkwyk advises (see: “Problems with a credit bureau?”, below).

Help from the ombud

In addition to helping consumers resolve disputes with the bureaus, the Credit Ombud also resolves credit disputes you may have with “non-bank” credit providers and debt counsellors.

Non-bank credit is credit issued by any entity other than a bank – in other words, credit providers including furniture and clothing retailers, microlenders, non-bank vehicle financiers and non-bank property financiers. (The Ombud for Banking Services handles credit disputes between consumers and their banks.)

Debt counselling complaints that the Credit Ombud’s office deals with may be in respect of debt counsellors and their clients’ creditors, including banks, and complaints that consumers in debt counselling may have against a payment distribution agency (see “What’s a payment distribution agency?”, below).

The ombud also acts as an educator of the public in matters pertaining to the credit industry; and is committed to acting honestly, independently and fairly, seeking to balance the rights of all parties.

WHAT’S A PAYMENT DISTRIBUTION AGENCY?

Debt counsellors are prohibited from collecting and distributing payments to credit providers once a consumer’s debts have been restructured. Payment distribution agencies are responsible for collecting repayments from consumers and distributing money to credit providers, in line with the restructured agreements.

PROBLEMS WITH A CREDIT BUREAU?

The Credit Ombud can help resolve complaints about credit information held by a credit bureau if they relate to:

* Inaccurate or incomplete credit information – for example, a default that shows you owe R200 000 when you owe R2 000;

* Outdated credit information;

* Adverse listings and the failure of credit providers to give consumers 20 working days’ notice before publishing an adverse listing;

* Consumers who have defaulted through no fault of their own – as in the case of retrenchment – and then rehabilitated themselves;

* Listings in respect of prescribed debt – which is debt for which the debtor is no longer liable;

* Duplicate listings of a single debt;

* Identity fraud;

* Service disputes;

* Costs and damages – for example, when a landlord lists the cost of damages to a property.

THE CREDIT PROCESS

Below are the steps typically followed by credit providers and credit bureaus when, for example, you apply for a loan, buy an item on credit, or need to extend the credit limit on your store card.

1. You, the consumer, apply for credit from a credit provider.

2. The credit provider processes your application. As part of the process, the credit provider will send an enquiry to one or more of the credit bureaus.

3. In response, the credit bureau issues a report to the credit provider.

4. The credit provider evaluates your report in respect of its own policies (appetite for risk) and makes a decision as to whether to accept or decline your application for credit.

5. If the credit provider decides to grant you credit, your credit profile could be used to determine the size of the deposit you may be required to put down and/or the interest rate that you qualify for.

6. The credit provider reports the terms of business back to you. If the credit provider decides to decline your application, it may sometimes frame its denial as if the credit bureau advised it not to take you on as a customer instead of stating that it has decided not to grant you credit because you may be considered a bad risk. Another credit provider may make a different call and decide to grant you the credit you are applying for.

The role of the Credit Ombud is to ensure that all parties play fair.

DISPUTES HANDLED BY THE CREDIT OMBUD’S OFFICE

Last year, the Credit Ombud’s office received 2 789 complaints relating to credit bureaus (the bureaus themselves dealt with 100 765 complaints), 2 217 complaints relating to non-bank credit providers, and 501 complaints relating to debt counselling. It took his office about 42 days, on average, to resolve a complaint, and the office put R2 million back into the pockets of consumers. Below are some of the disputes handled by the ombud.

Hasty sale in execution

A consumer applied for a loan to consolidate his debt. He registered a mortgage bond against his primary residence. The consumer defaulted on the loan. A judgment was taken, and the credit provider began the process of auctioning his home to settle a debt of R220 000 (the property was valued at R475 000). The consumer contacted the ombud. After negotiating with the credit provider, the ombud managed to halt the sale in execution, and the consumer agreed to resume the monthly payments. The ombud argued that it didn’t make sense that the consumer stood to lose his primary residence to settle a debt of less than half the value of the asset.

Bank account raided

A consumer entered into debt counselling in December 2009 and, to his knowledge, all of his creditors were being paid via a payment distribution agency (PDA). In April 2010, one of his creditors terminated the debt review process, alleging that the consumer was in default – in other words, he had not made payments in terms of the agreement reached between the debt counsellor and the credit provider. The credit provider proceeded with a sale in execution of the consumer’s property. The consumer contacted the ombud’s office. The sale in execution was halted after it was established that the consumer had not defaulted. It was found that the consumer’s bank had cleaned out his bank account to cover debts that he owed the bank. The bank did this before the PDA could access the consumer’s money and disburse it to all his creditors. The ombud managed to get the client back into debt counselling.

Overcharging attorneys

The attorneys of a credit provider obtained a garnishee order to deduct money from the salary of a consumer who had defaulted on his debt repayments. But they absconded without paying any of the money over to the credit provider. New attorneys were appointed and, via a re-issued garnishee order, they started deducting from the consumer’s salary the initial judgment amount. The consumer complained to the ombud. A paper trail was established and the consumer was refunded R4 000.

Debt not owing

A credit provider obtained a judgment against a consumer for a debt of R21 600. The credit provider duly obtained a garnishee order for R900 a month. The information was listed on the consumer’s record at a credit bureau. But the consumer insisted that the debt had been paid and contacted the Credit Ombud. The ombud’s office found that the judgment had been taken erroneously. The credit provider had the judgment rescinded at its own cost and confirmed that no debt was owed.

Debt counsellor problems

A consumer applied for debt counselling in 2009, but the debt counsellor he engaged had his licence revoked by the National Consumer Tribunal. A second debt counsellor gave the consumer the run-around and, after two years, his application for debt counselling had still not been heard in court. One of the consumer’s creditors, a bank, proceeded with a sale in execution of his home. Another creditor, also a bank, terminated the debt review and obtained a judgment to sell the consumer’s car. The ombud intervened and reported the second debt counsellor to the National Credit Regulator for investigation. The ombud’s office managed to halt the sale in execution and get the banks to agree not to withdraw from debt counselling. The consumer was then able to approach another debt counsellor.