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Addressing the elephant in the room – what happens to your credit score when you let debit orders bounce?

Article by David Crossley, Business Manager at BDO Wealth Advisors

It has been said that the slippery slide to alcohol or drug dependency starts with that first drink or that first joint.

Depending on the sort of addictive personality involved, this seems to trigger a reaction and the result is complete dependency.

I don’t think the same can be said of debit order payments, but there is a tenuous connection and it has to do with discipline and avoidance.

Before we deal with debit orders and their susceptibility to bouncing, let’s first look at a person’s credit rating and how it can be destroyed.

It is a sad fact that to obtain credit, a person needs to prove that they have had debt and have either satisfactorily discharged this debt over time via payments or are able to maintain payments on existing debt in such a way that they do not draw the attention of the credit rating companies.

Allowing a debit order to bounce will not attract the unwelcome attention of a credit rating agency – it is what happens after the debit order bounces that starts to cause the problem.

Let’s look at a sequence of events leading on from a debit order bouncing – which it does because there are insufficient funds in the account to meet the payment. Let’s assume that the debit order in question is the installment payment on your motor vehicle.

  1. The bank will bounce the debit order because of insufficient funds in your account.
  2. The finance company will notice that the payment has not credited your loan account.
  3. They will notify you politely and advise you that a double debit deduction will be made at the end of the next month. If this is met, there will be no further problems.
  4. If the double debit bounces, then the communication from the finance company will become more direct – they will probably ask for immediate payment of the two outstanding debit order amounts, as well as interest. The bank meanwhile will debit you an amount for the debit orders being dishonoured.
  5. If you don’t settle the outstanding debit orders with the finance company, then scary things start to happen. You will receive a letter of demand and a threat that unless payment of the outstanding loan amount (Yes – not just the outstanding debit order amounts!) is not paid, the vehicle will be repossessed by the finance company via the bailiff of the court.

It is at this stage that your credit score will take a considerable knock, because not only will you lose the vehicle, but the finance company will blacklist you.

In addition, if there is still money owing on the vehicle after they have disposed of it, you will be held liable for the balance.

Your failure to pay the balance could result in the finance company applying to have you sequestrated and declared bankrupt.

This is the equivalent of full drug or alcohol addiction and like drugs and alcohol addiction, you will have to be rehabilitated financially by someone else over a period of several years.

The moral of the story is twofold:

  1. Don’t let any of your debit orders bounce – catching up is very hard to do.
  2. Before you buy anything on hire purchase (HP), be sure that you have budgeted for the monthly debit order.

BDO is a proud Partner of the NSBC.