With the dawn of spring and the warmer summer months fast approaching, thousands of consumers will start looking into opening new accounts to stock their cupboards with the latest in-season fashion trends as well as signing up at a gym to get into shape.

“Opening new store accounts may look like an easy option to get all the new clothes you desire, but entering into such contracts is a long term decision and consumers have to think very carefully before signing on the dotted line”, says Credit Ombud, Nicky Lala Mohan. The office of the Credit Ombud has dealt with thousands of complaints where consumers have ended up with adverse listings at the credit bureau or have ended up being handed over for debt collection, simply because they did not pay the accounts in accordance with the terms and conditions of the agreements they signed.

“Monthly accounts need to be paid on time and the full amount due as per the contract, failing which there will be consequences, such as negative listings on the credit bureau or debt collections steps may be initiated”, says the Credit Ombud. “Unfortunately many consumers do not understand how this process works and they mistakenly think that if they skip a payment here or there, and make up for it later, it would not make a difference. The payment behavior of a consumer is recorded on a monthly basis at the bureaus and it does make a big difference if a person is skipping payments”, he warns.

Another major cause for concern is when consumers exaggerate their earnings or minimalize their expenditure when completing the affordability assessment when applying for a new credit agreement. .

“This behaviour may lead to dire problems for many consumers. Affordability will increasingly become an issue for most consumers if we have regard to the cost of living and the debt burden for consumers, as well as the recent amendment to the National Credit Act that came into effect on the 14^th of September 2015. It changes the manner in which affordability assessments are implemented,” warns Nicky Lala Mohan.

Many consumers can relate to down-playing or even at times being outright dishonest about their living and other expenses when filling out affordability assessments in order to apply for credit. Sometimes consumers claim to be encouraged by desperate sales assistants to down-play their monthly expenditure in order for them to qualify for the credit that they want because  in turn, the sales assistant earns that much needed commission from the  sale. However, this these claims will hardly assist consumers who signed the document and confirmed the truth of all the statements therein.

The new criteria to conduct an affordability assessment, applies to all current prospective and joint consumers; it applies to all credit providers and it also applies to all credit agreements to which the Act applies except where the consumer is a juristic person. There are a few other exceptions, notably when you are dealing with a developmental credit agreement; a school / student loan; a pawn transaction or an incidental credit agreement, so in case of doubt, consumers should refer to the Act or consult an expert . (Note that there are other exceptions not mentioned here).

Going forward, the new legislation places stricter requirements on the credit providers at the time of entering into a new credit agreement. It requires them to:

1. Ensure that they obtain 3 months’ pay slips; or the latest 3 months bank statements, reflecting 3 salary deposits; or Latest 3 documented proof of income or latest financial statements
2. They must work on average over not less than 3 months, in cases where there is a material variance in the income. This change is important for consumers to take note of, because in the past it was often possible to open an account immediately and by simply presenting an identity document. Now they will have to arrive prepared with the necessary documentation.
3. But proof of income is not the end of the matter. The next step is for the credit provider to perform a very specific calculation to ascertain the following:
   1. Firstly they have to establish gross income, as per the requirements set out above.
   2. Then they must deduct all the statutory deductions.
   3. Next they have to calculate what the “minimum living expenses” – according to the minimum expense norms, is, in order to establish the nett income.
   4. Finally they have to take into account all the consumers’ existing debt obligations, as may be reflected on the credit bureaus, and the net result is the consumer’s “discretionary income”.
4. The “discretionary income” is the amount available to repay new debt. The monthly repayment on any new credit agreement must be less than this amount.

“We always tell consumers that no one is in a better position to know if they can afford more credit than they themselves. They know their true monthly expenditure and how far they can stretch their budgets. Our best advice is for consumers to assess themselves before even going to a store to apply for credit or take on new service agreements which involve fixed monthly payments such as gym or cell phone contracts. If your budget is already stretched, resist the temptation to enter into an agreement which carries with it a monthly instalment with interest and costs,” adds Lala Mohan.

“Conducting your own real and truthful affordability assessment, and not just relying on the one to be conducted by credit and service providers, is a valuable practice that most consumers should adopt,” advises Lala Mohan.

Consumers should consider the following when applying for credit:

• Consumers should obtain a copy of their credit profiles before applying for credit to ensure that they credit savvy prior to application.
• If the credit provider decides that you qualify for more credit, it does not mean that in actual fact, you can afford it.
• It is better to assess your own finances very critically. In this way, you can save yourself from more financial or even legal trouble in the future.
• Consumers should also remember to always leave a bit of ‘fat’ in their budget for increases in interest rates and other unforeseen expenses which may place additional pressure on their finances.

Consumers can contact the office of the Credit Ombud for free assistance on matters relating to listings on the credit bureau and all non-bank credit transactions, such as clothing store accounts, being handed over for debt collection or being garnisheed. The office can be contacted on 0861 66 28 37; on the website www.creditombud.org.za or at ombud@creditombud.org.za, consumers can also sms our office on 44786 and a consultant will call them back.