On June 1 the National Credit Act comes into force, which will change the way credit is extended as well as increase the importance of customers’ credit histories.
It’s all about your record
Consumers who realise that their credit record is their most valuable asset and treat it accordingly will benefit, but those who are not prompt with payment and who over-extend themselves will find credit becoming increasingly expensive.
Banks are now able to charge customers for the risk they pose in terms of credit-worthiness. Credit card interest may now be 20%, but those who do not meet their monthly payments, may receive a call from the bank to “renegotiate” their terms.
Customers could end up paying 29% interest on credit cards or as much as 39% for an unsecured loan.
This is called risk-based pricing and, while it is a benefit to low-risk people with good financial management, it penalises those who are not.
Individual credit records, held by the credit bureaus, will determine borrowing rates, so it is worth doing regular credit-record checks to ensure that records are accurate and that there are no negative listings.
Applying for credit
When applying for credit, a new procedure will be added to the process. Apart from supplying a pay slip, proof of residence and ID, a statement of income and expenses must also be produced. This is a spreadsheet showing income and expenses such as food, housing, transport, education as well as a record of all outstanding debts including credit cards and store cards.
According to Mike MacMillan, head of credit at FNB, customers will not be asked to provide proof but will be required to sign that the spreadsheet is an accurate assessment of their finances.
This information will be double checked against the credit bureaus and act as a benchmark to check that customers’ monthly expenses are in line with someone in their position and living standards. This allows the bank to determine whether the customer can afford the loan, to calculate the credit rating according to its requirements and make an offer.
A major change will be the quote that the bank must provide, which must contain the details of the loan offering. It will be on a standardised form that can easily be compared to other credit providers. It will include the interest rate and all costs such as the initiation fee and monthly service fee.
The monthly service fee and interest rates will be determined by the risk profile. The maximum service fee is R50 a month. The interest rates vary depending on the loan and are a function of the prevailing repo rate.
For an unsecured loan, the maximum current interest rate is 39%, credit cards and overdraft facilities can attract a maximum of 29% interest and mortgages 25%. The better the risk profile, the less interest will be paid.
Debt counselling
A big change with the National Credit Act is what happens to defaulters.
The first port of call is to go to the credit provider, explain the problem and renegotiate payments.
“Credit providers are accommodating; the last thing they want to do is go the legal route,” says MacMillan.
But if a customer is not successful, or in a dire financial situation, the next step is to see a debt counsellor appointed by the state and who is partially subsidised by the state.
The lender cannot bring any action without informing a defaulter in writing of his or her rights to a debt counsellor. The debt counsellor will consider the case and if warranted will consult with all credit providers to reach a set repayment schedule that is affordable.
This is then taken to a magistrate’s court and a court order is issued, which states that the customer only needs to pay the agreed amount each month and protects him or her from further action from creditors.
But this is not a get out of jail free card. The minute the customer fails to make payments, the court protection falls away and the creditors can bring judgements against him or her.
MacMillan warns that debt counselling is not to be taken lightly. There are serious consequences of applying for a court order. A defaulter will be listed at the credit bureaus and a lender will not be allowed, by law, to lend that person money. A defaulters credit facilities will be closed down and his or her credit history will be tainted forever.
MacMillan says there has been some misunderstanding of the reckless lending caveat. The Act states that anyone who can prove that the lender behaved recklessly can have their debt overturned. But this will only apply after June 1. Bad luck for those who have been spending up a storm in the hope of having debts written off. Lenders have had until June to get their processes in place.
If the credit provider believes a debt counsellor has been unreasonable, it can argue against the repayments in court. This is an important check because some debt counsellors may be misinforming the court in order to assist clients.
No more nice banker
Until June 1 banks would honour the occasional debit order or bounced cheque. But under the Act, if a customer does not have a credit agreement in place the bank cannot lend money, even to cover the customer for a day.
“This is presenting a challenge. We are trying to accommodate customers but we will have to be tough on returning cheques and debit orders if there is no overdraft in place,” says MacMillan.
He suggests that all bank customers put a small overdraft facility in place so that the bank can accommodate them. However, customers must negotiate their monthly fee with the bank. The better your credit record, the lower the fee should be.