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Banking
Wednesday, August 1, 2007
Plastic plethora

Not a month goes by when I am not offered pre-approved credit. This month it was Direct Axis (again) and American Express. Neither know what the other is doing, yet both are offering a R50 000 loan.
How do either of them know I can afford to borrow (more) let alone take up both offers? It is this sort of reckless marketing that the National Credit Act 2005 (NCA) is trying to address. But if current practices are anything to go by it is going to be a long, and heavy road.
The American Express envelope (distributed by Nedbank) says, ‘You have been pre-selected for a Gold Credit Card.’ Inside is an invitation to complete an application form. Loans are currently charged at 22% per annum, plus fees and other charges. It gives a measly 5% on any credit balance. There is an annual fee of R230. There is an additional annual fee of R160 for ‘membership rewards’. A further R7,90 monthly charge per R1 000 of outstanding balance is also payable if you take the optional ‘payment protection plan’ (a form of credit life insurance). The add-on costs are excessive.
The 13-section application form is extensive, involves legal conditions, and the sale of insurance - all without the benefit of fit and proper advice. There is no guarantee the applicant will correctly answer the questions about his or her income and expenditure nor other current debt. One wonders how many people are being sucked into this package by what we believe are reckless marketing practices?
I also have three recent mailings from DirectAxis, a subsidiary of the First Rand Group, each with different messages on its envelopes: ‘Now make it happen with up to R50 000 in your bank tomorrow’; ‘Time is money – see inside for the quickest access to cash’; and, ‘Financing when you need it, whenever you need it’.
Let’s look inside and see what they are on about.
The most recent is an offer of a loan of from R4 000 to R50 000 over a period of two to seven years. ‘You can apply over the phone,’ it says, anytime from 8 am to 8 pm seven days a week, 365 days a year. ‘No face-to-face interview.’
DirectAxis, which it says in the letter, ‘promotes responsible lending’ requires applicants to provide their banking details and ID over the phone! I’d be very nervous about doing this, if I were you. Superintendent Jerome Hartenberg head of the Police commercial branch only recently warned people not to divulge information over the telephone.
The company says it is mindful of the security aspects and has an ‘information shredding system’ and ‘secure IT systems’ that manage the data. Even so, this could lull clients into the habit of divulging information over the phone to anyone who calls and sounds official. I don’t think it is a good protocol.
A Personal Protection Plan is automatically included in the fees (these, nor the interest rates charged are explained in the letter). There is a danger that this compulsory form of credit life insurance may be ‘conditional selling’. This is illegal in terms of Section 43 of the Short-Term Insurance Act 1998, and Section 106 of the National Credit Act 2005 (see separate story).


In any case if it is marketed as an ‘unsecured loan’ then how can there be a requirement for insurance, which would make it at least partially secured?
In two earlier letters DirectAxis offered the protection plan as an optional extra at R4,45 per R1 000 of the loan, plus a monthly administration fee of R9.50. Is the compulsory inclusion of such cover in the post-NCA offer, for which there must surely be a charge, legal?
Interest was previously charged at 23% per annum for loans up to R10 000, and at the rate of 20% for amounts above that. But as a DirectAxis spokesperson explains, “Because of the NCA we can no longer offer a pre-set rate. Instead this is discussed and agreed upon once the loan itself is approved.” However, when pressed for the rate currently being charged, she said it ranged from 18,5% to 30,9% per annum depending on various factors in the application form. DirectAxis has about 200 000 clients on its books.
The rates being charged are pretty high by any standards. Anyone who is a ‘good credit risk’ would be able to borrow at about 13% interest rate per annum (at current rates). Amex’s 22% rate must infer the offer is to people of less than good credit risk; even worse, if you can only borrow from loan companies at 39%. This is a very onerous burden on a person who is already short of cash. Nevertheless it is legal, but begs the question just how thoroughly are you able to assess someone’s ability to repay?  A R1 000 loan over a year at 39% costs almost R102 a month – a tenth of the debt. DirectAxis’s minimum R4 000 over two years at that rate works out at R242,60 a month, amounting to a total of R1 822,30 over the period, almost half the loan.
The maximum interest rate you can be charged on an outstanding balance is the current repo rate multiplied by 2.2, plus 10 percentage points. The repo rate is 9.5%, so the maximum you can be charged is 30.9% (9.5x2.2+10).
Despite the details requested in application forms of direct mail lenders, there is no guarantee the answers will be honest. From their point of view the mail recipients are complete strangers. Many are sent to post boxes so they do not even know for sure where the person lives, nor if they own a home or are remaining there.
They do not know how many credit cards a person has; they do not know how much an individual is borrowing; nor do they know if, for example, the target is financing a motor-car, or has heavy family commitments, unusual health costs or business loans.
Probably the most important point is that they have not conducted a ‘needs analysis’ of any sort, and cannot even say if the target needs what they are offering. It is all down to that application form and a recorded telephone conversation. How reliable is that?
I suppose they could glean something from, say, TransUnion  or Experian, which gather and collate credit, debt judgment and related personal information of borrowers — though I am not sure how reliable it is either. For instance, TransUnion thinks I am single and do not own property. Both are untrue.

Discount cards

But the plethora of cards does not stop on the lending side. Retailers want you to spend more, hence the huge increase in numbers and varieties of ‘discount’ cards, membership and club cards, and affinity cards and so on. Many of them offer ‘points earned’ per so many rands spent. But there must be a hidden cost of those benefits otherwise the companies could not afford to give them out. Some affinity programmes are linked to credit cards too. There’s eBucks, Discovery, Clicks and Woolworths, for example. These and many other cards encourage spending through the use of direct marketing by mail (since they have your details on record), loyalty points and season discount schemes.
Take a recent mailing, this time from Truworths, with the message on the envelope, ‘R300 vouchers inside’. It offers six months’ interest free credit. Using the enclosed card opens the account and entitles the client to the R300 of vouchers, but they must spend at least R1 050 to benefit. Of course, acceptance will also open the client to further direct mail offerings, not just specials and discounts at the various Truworths stores but also products such as life insurance and various affinity gimmicks.
One must appreciate how difficult it must be for many mail recipients to resist. One person we know has 30 cards. They can’t possibly keep track of their liabilities. And it is likely neither can the plastic card industry.
There should never be a reason for anyone to have more than one credit card. If they need to borrow more and can meet strict and fair lending criteria, then they should be able to increase the limit on that one card. Chances are the particular credit card company would not be prepared to do that, for example, to raise the limit from R30 000 to R60 000. Yet the industry seems happy for such client to have that limit under two or more cards. It does not make sense.

Card strategy

Most credit cards offer 55 days interest free credit on purchased goods. In addition, they reduce the danger associated with carrying cash. In order to benefit from the advantages clients should always ensure they pay back the full amount every month. If you can’t then you should rather make alternative arrangements for a cheaper, better structured loan.
Full payment is imperative. Supposing you had bought something for, say, R3 000 on the first day of a new period, but only repaid R2 950 on the due date, you would pay interest on the entire R3 000 and not only on the outstanding R50. Preferring to make the minimum repayment will turn out to be expensive, maybe another R70 or so on that R3 000 purchase – per month.
And there are other charges, making even more sensible only to own one credit card. Banks will levy an initial fee on a credit card. In terms of the NCA, the maximum charge is now R150 per annum, plus 10% of the agreement in excess of R1 000, but is limited to R1 140 including VAT. Also in terms of the Act, a further R57 a month can be charged as an administration fee.
Loyalty programs can be attractive, but hesitate before you make them the primary reason to choose one card over another, or to spend on them in order to build up points for, say, an overseas holiday. In deciding which card to use, rates and costs are a key criterion. Reward schemes should be considered an added extra, not a goal in themselves. Beware of the fancy frills and rather make an objective decision.
Meanwhile, Reserve Bank Governor Tito Mboweni keeps raising interest rates to try and stop people borrowing and spending. Perhaps the authorities should turn their attention more to the plastic people. Thank goodness for small mercies, that many people chuck the direct mail lures into the bin without opening them. By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:20.7 1st August, 2007
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