South Africa has a high level of debt among its citizens, with many people struggling to manage their finances and maintain their credit scores. One of the most commonly asked questions is whether debt counselling will have a negative impact on an individual’s credit score.
The short answer is yes, it can, but there are a variety of factors that determine the extent to which a credit score is affected by debt counselling. Your credit score will initially drop but it is likely to improve as you make regular debt repayments, which means that it could end up higher than before you started the counselling process.
Individuals who require professional debt management assistance can take advantage of a variety of debt counselling options. MSD Consulting is a registered South African debt counselling company with a team of experienced professionals who specialise in providing debt counselling services to people in need.
Understanding debt counselling
Debt counselling is a process in which a debt counsellor assesses an individual’s financial situation, develops a budget plan, negotiates with creditors and provides the client with ongoing support and guidance to help them achieve debt relief.
The National Credit Act of 2005 governs debt counselling in South Africa, ensuring that debt counsellors follow strict guidelines and adhere to ethical and legal practises. The goal of debt counselling is to help people overcome financial difficulties and achieve financial freedom.
Counsellors are responsible for providing individuals with the tools and knowledge they need to effectively manage their finances. The structured debt repayment plan developed assists them in regaining control of their finances while also addressing their overall financial situation. Individuals can also benefit from debt counselling by learning new skills that will help them maintain their financial stability in the long run.
How debt counselling impacts your credit score
There is a widespread misconception that debt counselling has a permanent negative impact on credit scores. The truth is that debt counselling can actually have a long-term positive effect on your credit score.
This is because debt counselling entails developing a structured repayment plan that assists individuals in consistently repaying their debts on time, demonstrating financial responsibility and accountability to creditors. Consistent debt repayment demonstrates that the individual is capable of repaying debts and managing finances, making them more creditworthy.
The effect of debt counselling on credit scores is determined by how well the individual adheres to the debt counsellor’s repayment plan. If the individual follows the plan and makes regular payments, their credit score is likely to improve over time. It is important to note that debt counselling does not improve credit scores immediately, but rather provides a long-term solution for credit improvement as debts are gradually repaid.
Factors influencing your credit score
Payment history, credit utilisation, length of credit history and credit types all contribute to a person’s credit score. Debt counselling can help with some of these issues by creating a budget and debt repayment plan that will allow you to make timely payments and ultimately improve your payment history.
The structured repayment plan controls credit utilisation by reducing debt and diversifying the credit profile. Debt counselling may not have a direct impact on the length of credit history or the types of credit. However, consistent payment and credit utilisation will increase the individual’s creditworthiness, positively impacting these factors in the long run.
If a person fails to make payments during the debt counselling process or does not follow the repayment plan, their credit score may suffer. As a result, it is critical that individuals adhere to the repayment plan devised by their debt counsellor and make regular payments consistently.
According to research conducted by the Debt Counsellors Association of South Africa, a majority of debt clients experienced an improvement in their credit score within 12 to 18 months. The research also found that individuals who completed debt counselling no longer defaulted on payments.
Potential limitations to be aware of
While debt counselling can be an effective way to rebuild credit, it is important to recognise that it may have drawbacks and limitations. In the short term, the debt counselling process may result in negative entries on credit reports as a result of missed payments before counselling engagement. This can have a negative impact on credit scores.
Counsellors can also advise individuals on how to mitigate the impact and rebuild their credit over time. Individuals must also accept responsibility for their overall financial situation and they must make timely payments and stick to a budget during debt counselling. Note that once you begin the debt counselling process, you cannot make new debts.
If a person does not stick to the repayment plan, it can lead to further financial insecurity and a drop in credit score. People should keep a budget, avoid further debt and practise responsible financial habits to maintain their creditworthiness during and after the debt counselling process.
Always remember that debt counselling is not a quick fix for poor credit health, but while it can be beneficial, individuals will need to work hard to maintain a healthy debt repayment plan and establish healthy credit habits.
MSD Consulting can assist you in this process by offering professional debt counselling services. You can achieve a more stable and desirable financial future by filling out an application form. Your journey to a debt-free future starts by contacting us today.
MSD Consulting is a registered debt counselling firm, committed to providing debt relief to all South Africans struggling with their monthly debt obligations. Our team of qualified debt counsellors and financial experts provide personalised debt counselling services tailored to your situation. For more information on debt resolution, follow us on Facebook and Instagram.