Should you switch to credit cards?

In May 2016, the amendments to the National Credit Act came into effect, which set new maximum ­interest rates that can be charged on a loan, based on the repo rate.

In many cases, this has reduced the maximum rate that creditor providers can charge, ­especially for credit card accounts.

This has, however, created some confusion around what interest rate you should be charged on your loan.

As one City Press 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 these ­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 and/or accounts ­entered into prior to May 6 2016.

Therefore, the newly amended interest rates will only apply to credit ­agreements entered into on or after May 6 2016.”

This means that your existing credit card account, opened prior to May 2016, is subject to the previous maximum interest rate, which naturally raises the question of whether or not to cancel your existing account 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 appropriate levels of pricing.

Theoretically, that means the interest rate applied to your card is based on your personal risk profile. So 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 profile 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 required, which could also affect the amount of credit that you would qualify for.

“The amended National Credit Act 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 Geoffrey Lee, head of Absa Card.

A better strategy would be to contact your bank to renegotiate 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 the requirement to settle your credit card account before closing it. If you are able to do that, you are probably one of the 15% of credit card holders who pay their account in full at the end of each month and never pay interest anyway.

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