Last year, before the implementation of the National Credit Act (NCA), one commentator prophesied that in a year’s time we would see headlines about how people can no longer access credit. How right he was, as we now find newly employed people struggling to establish a credit record so that they can get credit.
But the problem is not just the NCA. There is also fear on the part of the banks, as they see their bad debts climbing. There is something counter-intuitive in aggressively lending money at the bottom of the interest-rate cycle — when there are significant risks that rates will rise — and then cutting off all credit when rates are high and less likely to rise significantly. Yet this is exactly what the banks have done.
Just more than a year ago, before the NCA came into force, anyone receiving their first pay cheque would have been inundated with calls from banks offering credit cards. It was fairly easy to get car finance as well as finance for your first home purchase. In fact, most banks offered mortgages of 110% to assist that first-time buyer who did not have a deposit and needed additional funds to pay for transfer fees and moving costs.
Today, with interest rates 500 basis points higher, banks have tightened their lending. This has led to mortgage declines now reaching 50% and potential new home-owners being turned away. But if someone can afford a loan when prime is 15,5% and unlikely to rise above 16%, are they not a better risk than someone who could afford the credit when prime was at only 10,5%?
New market entrants have been particularly badly hit as they do not have a credit record. With the changes to the NCA, credit history has become even more important in terms of determining credit rating.
This has become a catch-22 situation, as one reader highlights. He has applied and been rejected for a credit card by his bank of nine years, and been rejected for a retail credit card and even a cellphone contract. “Right now I find myself in the ridiculous position where I am saving R5 000 a month, but can find no one to loan R500 for a month,” he writes.
Lenders have become completely risk-averse and have left a new generation without access to credit, which in turn prevents them from building a credit history. Nedbank says that as new borrowers have not built up a credit history, the best option is for the borrower to arrange a surety to support the credit application. Not everyone has someone who will stand as surety and nowadays it can be a legal quagmire one should not enter into lightly.
Banks need to consider the needs of this market as they will become the borrowers of the future — something banks need to survive. We are not asking for reckless lending, just decisions based on common sense rather than on fear and greed.
What you need to get credit
According to Virgin Money, approval for a credit card relies on many factors built into the credit provider’s scorecard. This is the yardstick that is used to make sure credit is given where credit is due and includes income, expenditure and the applicants’ ability to prove that they can manage credit.
In the case of someone who does not yet have a credit history, the application will go through a manual process where the applicant will be asked to deliver proof of various aspects to make sure he or she meets the affordability requirements, as the credit provider needs to prove it is not lending money irresponsibly.
Virgin says building a good credit history relies on one’s ability to show that one can manage credit, big or small. A simple way is always to make sure that personal details are updated at one’s bank and that one manages any account that one might have, such as a cellphone or municipal bill, punctually. A simple way to start building credit history is to open an account with a retailer.