Defaulting - what does it mean, and what are the consequences?

The ever-increasing cost of living can make financial obligations, such as paying debt instalments, challenging. However, defaulting on repayments can have dire consequences.

We outline what it means to default on a credit agreement, and how you can limit the damage if you find yourself in this situation.

Tip: A responsibly-managed credit facility can create opportunities. Find out more about a flexible credit facility that’s tailored to your needs.

What does it mean to default?

Defaulting occurs when you fail to make a payment, or reverse a debit order set up to make a payment, which is due in terms of a contract or credit agreement.

“Defaulting in this context means that a consumer has failed to pay the agreed amount or instalment on the agreed date, as specified in an underlying agreement,” explains Gerhard van der Merwe, senior associate at Trudie Broekmann Attorneys.

While the National Credit Act 34 of 2005 does not include a specific definition for defaulting, Van der Merwe notes, it does make provision for credit providers to apply administration charges if consumers do not keep to their agreements.

Denise Hartley, chief operational officer at FNB Collections, offers a simple rule of thumb - you know that you are in default if your statement of account shows any arrears.

Why defaulting is serious

Providers can take legal action

When you breach your credit agreement, your provider can act against you.

“A credit provider has certain contractual and legal rights when a consumer defaults,” Hartley says. “Although many credit providers try to resolve the matter amicably, they are legally entitled to enact enforcement procedures. This process can be expensive for both parties.”

You will pay more interest

Because payment has not been made to reduce the credit balance, Hartley explains, defaulting results in the accrual of additional interest. Your debt repayment term will also be extended, further increasing the total cost of the credit.

It goes on your credit report

“Defaulting is reported to credit bureaus and will reflect on your profile for a year, or until you have brought the account up to date,” Hartley warns.

This affects your credit score negatively, resulting in potentially higher interest rates in any future credit agreements, and/or difficulty in qualifying for credit.

Your cover may be suspended

Defaulting on contracts, such as insurance and medical aid, may entitle the service providers to suspend your cover until payment is received.

How you can limit the damage

There are various ways to mitigate the damage caused by defaulting. Hartley and Van der Merwe suggest the following:

• Contact your credit provider promptly and arrange a repayment, if you have the funds available.
• Commit to increasing your repayments every month, if you are unable to settle the arrears amount in full.
• If your financial situation has changed drastically, and you can no longer afford your monthly instalments, advise the credit provider as soon as possible. “Most reputable credit providers have processes and programmes to assist consumers who have defaulted,” says Hartley. 
  It’s important to undertake this option, where required, as soon as possible. Leaving things for too long is unlikely to result in a positive outcome.
• If alternative repayment arrangements cannot be made, a reputable debt counsellor may be able to assist you.  

Always engage with your credit provider, even if you think it’s too late for any meaningful solution, Hartley advises.

“The worst thing you can do is ignore the situation. A solution can generally be found if you are proactive about speaking to your credit provider,” she says.

Tip: If a credit provider takes legal action against you, your credit score may be affected. Check your credit score today.