The other day I was very excited at the prospect of passing a new milestone in my life. I had recently finished my studies at university and for the first time was earning a steady salary that met the banks’ minimum income requirements. The time had come to apply for my first credit card. After all, a credit card would make a huge difference to my life. I’d be able to purchase items on-line, make reservations and, of course, use the machines at the movies instead of having to stand in the long queue to pay in cash for my tickets.
To my amazement, the bank rejected my application. I had no credit history and was thus “high risk.”
How stupid, I thought, they turn away a perfectly good customer for no good reason. Fine, I decided, that bank can lose a customer, I’ll just contact another. When I approached the second bank, I was subjected to an online computerised application. To my horror, the result it spat out was ‘application declined’. I immediately phoned the bank and demanded to know why my application had been declined. Same story – I had no credit history.
‘How am I supposed to get a credit history when no one will give me a credit card?’ I asked. ‘Do I have to go to Botswana to get a credit card so that I can establish a credit history for myself?’ ’
‘Do you have some other kind of credit record, like a gym contract, a cellphone contract or store account?’ they asked.
‘Sorry. No. If you recall, I’ve just finished my degree and have been living off my parents.’ I then explained that I’d never opened any store accounts because I loathed the idea of buying clothes or food on credit; that my spending philosophy is generally debt-wary. In finance classes I’d learnt how, over time, debt can burn away wealth. Ironically, I now had to reckon upon my apparently poor spending decisions. Because I’ve always paid in cash and avoided debt, I have no debt record and am not allowed to have access to credit.
Later, a wonderfully helpful man called me from the first bank. He said I could reapply for a card later in the year, but in the meantime, in order to establish a credit history, I should open accounts at a store or two and use them to buy some stuff on credit.
‘Do you mean,’ I asked, ‘that I should spend thousands of rands over several months buying things I don’t want and wouldn’t have bought otherwise and get myself into debt so that I can qualify for a credit card? ‘Yes,’ he said. Thoroughly frustrated by this, I told my boss at the FMF of my predicament. That was when I learnt about a piece of legislation called the National Credit Act (NCA). On 1 June 2007, the NCA was implemented in South Africa to widespread support. Almost everyone knows someone whose life is in shambles because they have too much debt, so they were delighted that government was finally going to stop banks from recklessly lending money and locking people into a lifetime of debt. Apparently, before the Act was implemented, banks would lend even to poor people and then have them thrown in prison when they couldn’t pay.
My boss pointed out that I should be grateful because the credit act had been designed for my protection. He also explained that the National Credit Act left the banks no other choice but to exclude me from getting a credit card because it allowed me to avoid paying back my debt on the basis that they had “recklessly” let me have access to credit. Before the act, I would have had no problem being granted a credit card, but not anymore. The man from the bank had told me the same thing.
Ashamed of my self-destructive desire for credit and grateful that politicians could protect me from myself, I undertook to look into some of the results of the act.
Before the act, the write-off rate of banks was less than 1%. The write off rate since the act is 2%. This means that before the act 99% of people were paying off their debt in line with their agreements. Somehow banks were already lending to the people who were most likely to pay them back without the need for any help from a National Credit Regulator (NCR). Today, because they are terrified of intervention from the NCR, banks no longer help clients who are struggling to pay by, for example, restructuring debt payments. Instead, they immediately foreclose on the client. A result of the NCA is that the foreclosure rate has doubled.
I also discovered that 80% of South Africa’s 17-million debtors have credit worthy scores, which means that 80% of South Africans are good at paying back their credit. This may explain why banks continue to hand out some credit. When clients don’t pay, banks usually resort to blacklisting them. Only when the outstanding amount of debt is very high do banks sue, which makes sense because it is a very expensive process.
This discovery revealed how ludicrous the idea was that before the act banks would hunt down poor people to throw them in prison for outstanding debts. The truth was that if a bank found it had loaned money to a poor person who turned out unable to pay them back, it would write off the money, blacklist the person and not lend to them again. I challenge anyone to find one story of a poor person who had failed to pay back a small loan and was arrested or sued for doing so.
While researching for the benefits of the act, I learnt too about my boss’ housekeeper, Gladys. Gladys received a loan several years ago to build herself the small house in which she now lives. If she had waited and tried to raise the loan today, in attempting to protect her, the NCA would have prevented her from being approved for a loan and would have forced this elderly lady to live in a shack for the rest of her life rather than enjoy the dignity and pride of owning her own well-built house. Gladys does have to buy fewer things every month because of her debt payments, but it’s a sacrifice she’s prepared to make. When faced with the choice of a nice house and food from Checkers, or a shack and food from Woolworths, she was able to choose the first option.
I have come to the conclusion that the presumption by government that people don’t know what’s best for them and are unable to judge whether they are being suckered into utilising credit that they can’t afford, even though they think they can, is the highest insult. A sad and regrettable effect of the NCA is that it claims people like Gladys are incapable of making important choices for themselves and that it is in their best interest that they should be locked out of the option of credit.
The range of negative implications of the NCA abound. Students find it impossible to obtain student loans when they need them. First time house-buyers cannot raise mortgages. Businesses that would assist their employees with pay advances or small loans based on an established relationship of trust are forbidden from doing so. Small business owners, no longer able to get loan approvals, have to shelve valid expansion projects. Every range of business that relies on credit, from car dealerships to furniture stores, has seen sales plummet. And of course, as I’d discovered from personal experience, low income earners who had always relied on cash, when applying for an entry level credit card, have also been locked out.
My conclusion is that the unseen effects of the act far outweigh the intended benefits. It’s time to repeal this senseless law that makes millions of consumers’ lives more costly, inconvenient and miserable without any hint of benefit. It’s time to hand back to every citizen of this country the right to make the choices which allow them to use every available opportunity to improve their quality of life and that of others and which lead to economic growth.
By Gavin Ray.
Gavin Ray is an Intern at the Free Market Foundation.