The new maximum interest rates do not apply to existing credit cards
In May 2016, amendments to the National Credit Act came into effect which set new maximum interest rates which can be charged on a loan based on the repo rate. In many cases this has reduced the maximum rate that credit providers can charge, especially around credit cards.
This has, however, created some confusion around what interest rate you should be charged on your loan. As one reader wrote, “the new maximum interest rates for credit cards is now 21%, yet my bank continues to charge me a rate of 22.5%.”
What is important to understand is that the amended interest rates only apply to new credit agreements. According to the National Credit Regulator, “The new published interest rates do not apply retrospectively to credit agreements entered into, or accounts opened, prior to 6 May 2016. Therefore, the newly amended interest rates will only apply to credit agreements entered on or after 6 May 2016.”
This means that your existing credit card, opened prior to May 2016, is subject to the previous maximum interest rate, which naturally raises the question as to whether or not you should cancel your existing credit card and take out a new one, given the lower maximum rates.
According to Absa, customer pricing across most banks is done at a personalised level which takes into account several factors when determining the appropriate level of pricing. Theoretically that means the interest rate applied to your card is based on your personal risk profile. This means that if you are considered a higher risk, you may find it difficult to obtain a new credit card or find your credit facility reduced.
If for example the bank considers your risk prolife too high to offer a credit card at 21% and you close your existing facility at 22.5%, the bank could turn down a new application. New affordability tests are now also required which could also affect the amount of credit you would qualify for. “The amended NCA requires a new stringent credit risk assessment, as well as an affordability calculation and income verification for all new applications which might impact adversely on the approval status, credit limit and risk-based pricing extended to the customer’” says Geoff Lee, head of Absa Card.
A better strategy would be to contact your bank to re-negotiate your current credit card interest rate. You could also shop around at other banks to see if you would qualify for a credit card at a lower rate before cancelling your existing one.
Then there is also the small matter that you would actually have to settle your credit card before closing it. If you are able to do that, you are probably one of the 15% of credit card holders who pay their card in full at the end of each month and never pay interest anyway.
The new maximum interest rates
(Based on a repo rate of 7%)
- Unsecured credit (for example, personal loans): RR + 21% p.a. = 28%
- Mortgage agreements (home loans): RR + 12% p.a = 19%
- Credit facilities (for example, credit cards and store cards): RR + 14% p.a. = 21%
- Developmental credit: RR + 27% p.a. = 34%
- Incidental credits (for example, if you are late paying your doctor’s bill, he can charge you interest at this rate): 2% p.m.
- Other credit agreements: RR + 17% p.a. = 24%
- Short-term transactions: 5% p.m. on first loan and 3% p.m. on subsequent loans within a calendar year.