A pensioner was shocked to discover that a TymeBank credit card comes with a mandatory fee for compulsory credit insurance.
It is good financial management to check all the costs involved when taking on credit, and this is exactly what pensioner Iain MacKinnon did when considering switching to a TymeBank credit card.
He discovered that TymeBank included compulsory credit insurance of R4.50 per R1 000 on the outstanding balance. As MacKinnon planned to spend around R5 000 a month on his card, this would add R22.50 to his monthly card fee of R60.
For someone with an outstanding balance of R20 000, this compulsory credit insurance adds R90 a month to the fee.
MacKinnon is not paying any fee for credit insurance with his current bank, so he questioned whether a credit provider could make credit insurance mandatory.
NOTE: Since the publication of this article highlighting the concerns of customers, TymeBank informed Maya on Money on 8 June 2022 that it had reduced the monthly fee from R60 to R40 and that the Credit Insurance is no longer compulsory
Not in line with regulations
According to the National Credit Act, a credit provider can require credit insurance which covers debt repayments should you be retrenched, become disabled, or die.
However, TymeBank’s policy of a flat R4.50/R1000 is “not in line with the credit life regulations”, according to the National Credit Regulator.
TymeBank released a statement, saying that it “does not apply individually tailored interest rates or credit life pricing ‒ all customers are charged on the same basis. This obviously means that lower-risk customers will end up cross-subsidising higher-risk customers, but this is a reality for any credit product.”
In August 2017, new regulations were introduced to combat the abuse of credit insurance in the microlending industry.
Prior to the implermentation of these regulations, it was not uncommon to see microlenders charge credit insurance premiums as high as R54 per R1 000 of the outstanding balance.
While the maximum rate a credit provider can charge for credit insurance on loans is set at R4.50 per R1 000 (excluding VAT), it included specific rules.
The premium must be in line with the requirements and risk of the consumer. A consumer who is unemployed, a pensioner, or self-employed cannot be charged a premium for retrenchment cover.
According to the Regulator, in these cases “the risk of retrenchment must not be included in the cost of credit life insurance and the resultant amount charged may be lower than the maximum prescribed by the Regulations.”
In the case of pensioner MacKinnon, he would never be able to claim for retrenchment and could argue that he faces very little risk as his credit limit is R5 000 and he has more than enough assets to cover this debt.
TymeBank and its credit card service provider RCS, believe the credit insurance fee is in line with regulations.
“Our policy intentionally does not link the insurance cover to occupational disability or retrenchment,” says RCS CEO Regan Adams.
“It explicitly talks about loss of income. There are pensioners out there that have many different forms of income which may be lost: rental income, their pension fund going insolvent, etc. Our policy would cover them in these above-mentioned events.
“Given this approach, we are comfortable and confident that our policy terms are fully in accordance with regulations.”
While RCS could not specify under what situations a pensioner could claim loss of rental income, Adams said during the 2020 lockdown, RCS paid claims for partial loss of income in situations where people were out of a job for a few months or on a reduced income level for a specified period of time.
Other banks’ policies
We spoke to several other banks to confirm their position on credit insurance when taking out a credit card. Most do not have compulsory credit insurance.
An Absa Credit Protection Plan is not mandatory when applying for an Absa credit card, however, the bank does encourage customers to consider this option, according to Eugene Strauss, Managing Executive: Absa Life Insurance, Retail and Business Bank. The bank offers two options:
- Plan A – R3.30 to R4.10 per R1 000 (Benefits package: Loss of Income/Retrenchment Cover, Disability [Temporary and Permanent], Death and Critical Illness cover).
- Plan B – R2.90 to R3.60 per R1 000 (Benefits package: Disability [Temporary and Permanent], Death and Critical Illness cover)
If customers are older than 63, Plan B usually offers better value and pensioners are actively encouraged to take this plan. Under plan B pensioners are not charged for the loss of income benefit, thereby matching the pricing and benefits eligibility.
Credit insurance for credit cards is not mandatory, says Mpho Sadiki, Head of Function: Trading Products & Solutions at Nedbank. The premium is not dependent on a client’s profile but is variable and calculated based on the highest outstanding balance within a statement cycle.
Charl Nel, head of communications at Capitec says that their credit insurance premium is risk dependent. When applying for a credit card at Capitec, your individual credit risk assessment is used to determine whether you need to have credit life insurance, and if so, what the cost is, based on the specific risk.
Clients who do need to have this insurance may choose to take up the product offered by Capitec or they may use a different insurer that provides suitable cover. The price of the credit insurance ranges from R2.48 to R4.50 per R1 000 on your average outstanding balance and is calculated monthly on the client’s statement.
Standard Bank does not require compulsory credit insurance on any credit card. It is an optional product that a customer can choose.
The rate charged is R4.93 per R1 000 of the outstanding balance for a comprehensive plan. When the customer turns 65 years old, the cover converts to death-only cover, which is charged at R4.89 per R1 000 of the outstanding balance.
This rate is above the R4.50 per R1 000 cap, but according to Standard Bank, the credit insurance rate cap applies only to mandatory cover.
Credit insurance is a voluntary product, according to Lee Bromfield, CEO: FNB Life. The rate charged is based on the customer’s profile. For instance, some customers don’t qualify for the retrenchment benefit so they would pay less for the product.
This article first appeared in City Press.