The purpose of debt consolidation is to assist customers in financial distress by combining their debt and allowing them to service it through one affordable instalment over a longer period, states Rekha Ramcharan, Absa’shead of personal and business lending for retail banking. But once you’ve consolidated your debt, can you take out new credit?

The simple answer is yes, you may be granted new credit, but according to Ramcharan: “Customers are not encouraged to take additional loans after consolidation. Only once they have been rehabilitated and in consultation with their financial institution should they consider taking up new debt.”

Are creditors allowed to grant you credit post debt consolidation?

While there is no rule against providing new credit to customers who have opted for debt consolidation, credit providers have to conduct due diligence before granting loans. “They will conduct an affordability assessment, which will take the consolidated loan into consideration to determine the loan amount the customer can afford. Some lenders list their debt consolidation loans as “debt consolidation” and depending on the credit provider’s risk appetite, they can decide whether or not to grant a loan,” Ramcharan adds.

Once the information of you being enlisted in a debt management company feeds into your credit report, however, there is a chance your application for new credit could be turned down. In addition, if you are participating in a debt management program your income to debt ratio is likely to be high and could be the reason that you could be blocked from gaining new credit too. Another important point to keep in mind is that even though you could be granted new credit it doesn’t necessarily mean there’s confidence in you being able to manage the payments. If you do happen to acquire new credit, the task of carefully and cautiously managing it will still be key.

How does debt consolidation affect your credit report?

“Debt consolidation does not affect your credit report. Only once a customer goes into debt counselling will the credit report be affected negatively,” adds Ramcharan.

 

Until next time,
The MoneyShop.co.za Team