With 51% of adults in South Africa being credit-active and 29% over-indebted, credit plays a big role in most South African households. Therefore we are mastering 4 basic credit terms this month:
Prime Lending Rate
The prime lending rate is the rate that banks use to lend money to clients. Currently the prime lending rate is 10,25%. Banks will offer loans and financing to low-risk client at the prime lending rate or even a rate lower than prime for example prime minus 0,5% which means clients will effectively pay 9,75%. Banks will offer loans and financing to high-risk clients at a rate higher than the prime lending rate for example prime plus 1,25% which means clients will effectively pay 11,5% interest. The prime lending rate is thus the base rate for borrowing money from banks. The prime lending rate is determined by the repo rate. The repo rate is the interest rate at which the banks borrow money from the Reserve Bank. Currently the repo rate is 6,75%. When the repo rate increases the prime lending rate will increase as well. The prime lending rate can be viewed as the repo rate with a profit margin added for the banks.
A credit rating or a credit score is calculated by credit reporting agencies by using the individuals’ credit history. A credit score represent an individuals’ creditworthiness. Lenders and retailers use credit scores to determine whether a client or customer will be able to repay debt as per the agreement. It is important to maintain a good credit score by repaying debt on time and don’t miss payments or pay less than the required instalments. A poor credit score can make it difficult or almost impossible to apply for debt. Credit ratings are also allocated to companies and indicates the companies’ ability to pay its creditors and debt and give an indication to investors how good or bad the companies’ shares are likely to perform.
Banks and financial institutions will run an ITC check whenever a client applies for debt. Employers also require ITC checks before appointing new recruits. Credit bureaus are responsible to maintain credit records and provide the information on request. The credit record illustrates the consumers’ behaviour when it comes to credit. Any late payments, skipped payments or judgements are recorded on a consumer’s credit record. When an ITC check discloses a poor credit record the consumer’s application for debt might be declined and an employer will most likely not appoint a person with a poor credit record.
During a debt review process, also referred to as debt counselling, a debt counsellor will assist a consumer who is over-indebted with advice and a plan to repay the debt. The debt counsellor will assess the outstanding debt and then come up with a method and plan to restructure and repay the debt which is more affordable for the consumer. Debt review is a legal process governed by the National Credit Act (NCA) and regulated by the National Credit Regulator (NCR).