Can I apply for more credit or use my credit cards while under debt review?

Debt review, which is also known as debt counselling, is a formal legal process regulated under the National Credit Act (NCA) in South Africa. It’s a supportive process that aims to assist overindebted individuals.

We explore how the process works, and whether you can apply for, or use, more credit while you are undergoing it.

Can I apply for more credit or use my credit cards while under debt review in South Africa?

No, while you’re under debt review, or debt counselling, you cannot apply for more credit or use your credit cards.

Once you enter the process, a “flag” is placed on your credit report. You cannot apply for new credit or use any further credit via your existing facilities.

This is a condition of the National Credit Act, which is there for your own protection.

Debt counselling is a debt rehabilitation process, and is designed to make your debt more manageable. By restricting access to new credit, you can focus on paying off existing debt and avoid accumulating more, helping you escape the debt trap.

It’s essential that you stick to the terms of your debt counselling agreement to ensure the process is successful, and avoid any legal consequences.

Before you embark on the debt counselling process, make sure you understand how it works. Here’s an in-depth debt counselling guide.

What happens if I use my credit card while under debt review?

You can’t use your credit card once you’re under debt counselling. Any attempt to do so would violate the terms of your debt counselling agreement.

If you don’t adhere to your debt counselling agreement, your creditors may request the termination of your agreement. This means you will no longer be legally protected, potentially leading to a court judgment against you. This will be flagged on your credit profile, and decrease your credit score.

What happens if I apply for more credit while under debt counselling? 

Applying for more credit while you are under debt counselling is prohibited by the National Credit Act.

Credit providers are required to check your credit record before approving a credit application, and if they know you are under debt counselling, they are legally obliged to decline your application. If they extend credit to you, knowing you are overindebted, they will be guilty of reckless lending.

If you feel the need for additional credit due to financial strain, ask your debt counsellor to help adjust your budget. Look for ways to reduce expenses or generate extra income to meet your short-term financial needs.

When can I take out more credit?

Technically, you should be able to apply for credit relatively soon after getting your clearance certificate, but it’s recommended that you wait several months and monitor your credit report.

This will help you adopt new, sound financial habits and rebuild your credit reputation.

A clean credit record allows you to access credit and apply for financial products, but approach this cautiously as it’s easy to fall back into the debt trap.

Taking out an unsecured loan may not be advisable. Unsecured loans – loans that are not backed by assets – typically have higher interest rates, which may be harder to manage, increasing the risk of default.

How does a clearance certificate work? 

A clearance certificate is a legal document that will be issued to you at the end of your debt counselling journey, when your restructured debt has been settled.

The faster you complete your repayments, the sooner you can obtain your clearance certificate. As part of the process, your debt counsellor will confirm with your creditors that each debt has been settled in full.

Your clearance certificate will be submitted to your creditors and the credit bureaus, and will facilitate the removal of negative listings, including defaults and judgements, from your credit report. Your credit score will have steadily improved during the debt counselling process, and you can work on improving it further, once you have your clearance certificate.

What if I want to end debt review early? 

The NCR does not allow you to exit debt counselling voluntarily. You can only exit if:

• Your debts have been paid in full and you have obtained a clearance certificate from your debt counsellor, or
• A court order removes you from debt counselling. This only happens under exceptional circumstances.

Think carefully before you attempt to exit prematurely. An early exit can lead to severe consequences.

If you really have no option but to exit, your debt counsellor can advise you of your options.

Why should I stick with the debt review process?

Sticking with the debt counselling process has several advantages:

• Reduced interest rates. Your debt counsellor will negotiate lower interest rates with your creditors, which will help to reduce your overall debt burden.
• Consolidated payments. You will make a single, affordable monthly payment to a payment distribution agency, which will distribute the funds to your creditors. This will simplify your finances.
• Legal protection. Being in debt counselling can provide protection from your creditors (except where court orders apply). This prevents creditors from taking legal action against you.
• Financial guidance. Your debt counsellor can provide you with financial guidance, helping you free up funds to repay your debts comfortably while having enough money to pay your monthly bills.
• Improved credit score. Your credit score will improve over time if you exercise financial discipline and successfully complete the debt counselling process.

Sticking with debt counselling will help you to achieve financial stability and improve your financial wellbeing in the long term.

Moving forward after debt review 

It is possible to move forward after debt counselling, provided you continue to exercise financial discipline. This may involve careful planning and possibly working with a financial coach or planner.

Here are some guidelines to help you stay on course:

• Set financial goals and create a realistic budget. This will help you manage your income and expenses. Monitor your spending to identify where you can cut costs. 
• Build up an emergency fund. It’s wise to have at least three months’ salary saved up so you’ll be covered in the event of unexpected expenses. However, if you can’t manage three months’ salary, save as much as you can. 
• Focus on rebuilding your credit score. Make timely repayments and don’t be overly reliant on credit.

Getting back on track financially

Getting your finances back on track is possible, even if it seems challenging. Here are some tips:

• Be sure to pay your bills on time to avoid late fees and penalties. 
• Avoid spending unnecessarily – focus on what you need rather than what you want.
• Budget for treats so you won’t be tempted to make impulse purchases.
• Avoid taking on credit, or limit its use. If you do take out a loan or use a credit card, make sure you can pay your balance in full every month. If possible, choose credit products with low interest rates.
• If you find yourself getting back into financial difficulty, take action to limit the damage before you spiral into debt.

If you’re overindebted, the best thing to do is seek guidance. Contact DebtBusters to determine if you may benefit from debt counselling.