Understand the differences between debt review and debt consolidation, and find out how to manage your debt effectively. Picture: Independent Newspapers.
By: Ester Ochse and Alpheus Legodi
Having lingering thoughts about debt and money issues can impact your quality of life, health, and mental well-being. The stress of being in debt, coupled with pressure from creditors and societal stigma, can lead you down the path of anxiety, depression, physical illness, and financial hardship.
All of this can leave you desperately looking for an easy way out and seriously considering a potentially risky course of action, including giving in to the persistent advances of unethical debt counsellors.
According to the National Credit Regulator (NCR), there is a worrying new trend of debt counsellors engaging in deceptive and misleading practices of placing desperate or unsuspecting consumers under debt review without their full knowledge of what the process entails or what the long-term implications are.
Many South Africans have received calls from the salespeople on the other side of the line guaranteeing them that they can save themselves a world of trouble by cutting down the interest or instalments they pay on their accounts or loans. Sometimes, these salespeople even claim to be calling from or working with, the NCR.
If you’re not feeling as though you are in financial despair because of your debt, you probably just courteously end such calls as you would any other unsolicited phone call. However, if you’re feeling particularly vulnerable and desperate, due to your debt or financial situation, here’s what you should ask yourself before you let the salesperson continue talking, drawing personal information from you, and hard-selling or convincing you to inadvertently get yourself into debt review:
If your answer is ‘No’ to either one or both questions, your best course of action is to hang up the phone call, despite the promises of the person on the other end of the line. Similarly, if your answer is ‘Yes’ to one or both above questions, you should still hang up the phone and instead call your bank and find out what options are available to help you manage your debt obligations. The important thing is to speak to your bank first.
The trouble with these unsolicited phone callers promising you a debt-relief world is that they are often misleading about how they propose to ‘solve’ your debt problems. The NCR notes that these people deceive vulnerable consumers into entering a process called debt review – which is often reserved for people in severe financial difficulties close to bankruptcy. The NCR further notes that: “Some consumers only become aware of the debt review flag when they apply for credit or when they attempt to use their existing credit facilities”.
Understanding the difference between debt consolidation and debt review
According to the NCR, debt review is a formal process that was introduced by the National Credit Act (NCA) as a voluntary debt-relief measure to assist over-indebted consumers. And, in fact, once a consumer is under debt review, he or she can no longer enter into further credit until the debt review application entered on his or her behalf is rejected by the debt counsellor or by the Magistrate’s Court, or until all debt obligations are fully settled.
Debt consolidation is a process offered by banks on the other hand, allowing consumers to consolidate the debt held with various credit providers into one manageable debt that they can pay off. Debt consolidation can lead to better control and financial relief for the consumer.
If used correctly, debt consolidation can be a powerful money management tool for consumers as it also helps them to avoid dealing with numerous creditors who charge varied interest rates. However, there is a need for more education on what debt consolidation is and isn’t, to ensure that consumers can maximise its benefits.
Therefore, it’s important to highlight the difference between debt consolidation and debt review by addressing some of the myths related to debt consolidation.
Three myths about debt consolidation demystified:
Myth 1- Debt consolidation will hurt your credit score: There will be an initial bureau inquiry on your credit report; however, over the longer term, debt consolidation could help improve your credit score as you'll have more control over your credit commitments.
Myth 2 -There will be an adverse listing on your credit report: Debt consolidation is often confused with debt review. Unlike with debt review, with debt consolidation, you will not be listed and are permitted to take further credit if you can afford to.
Myth 3 - Debt consolidation automatically decreases your debt: You can benefit from monthly cashflow unlock from the term extension; however, you are still required to repay the full outstanding amount you owe.
The high interest rate environment has affected the cashflow of many households, and debt consolidation is one of the most effective money management tools that can help customers free up monthly cashflow. However, it doesn’t take away the habit of knowing how to manage your money effectively. Consumers are advised to approach their financial institutions or advisors before choosing to go for debt consolidation.
Debt review has long-term implications on one’s ability to take up new credit and does hurt the credit report. As such, for your own peace of mind and future financial well-being, it’s critical not to allow your judgment to be clouded by the influence of debt counsellors who want to lead you down the path of debt review without fully explaining the consequences- no matter how dire you might think your situation is.
* Ochse is the product head for integrated advice and Legodi is the loans product head, at FNB.
PERSONAL FINANCE