Skeletons in the closet

According to the National Credit Regulator (NCR), credit facilities of R3,63bn granted through store cards in the second quarter of 2011 were more than a third up on the previous quarter and a whopping 41% up year on year.

Store cards are classified as credit facilities, together with credit cards and overdrafts, and can attract an interest rate of up to 22.1%.

Clothing retailers make no secret of the fact that they are on a drive to attract new account holders.

"We grew our account base by 10% last year and aim to grow it by 6%-10% this year," says Foschini financial director Ronnie Steyn.

Truworths grew its account base by 11% in its year to June 2011.

Beyond the magnitude of the credit expansion, another notable feature is a swing from traditional six-month revolving interest-free credit accounts to 12-month accounts bearing interest. This trend has been reported by Foschini and Truworths.

Steyn says interestbearing accounts permit a bigger credit facility to be offered but, because the repayment period is longer, monthly instalments remain the same. "Interest rates have little to do with demand for credit. It's all about the affordability of monthly repayments," says Steyn.

This holds true in the furniture retail sector, where, in addition to interest and loan initiation and ongoing admin fees permitted under the National Credit Act, many retailers require borrowers to take out credit life insurance. For example, in its year to March, furniture retailer Lewis Group reported that the effective interest rate on its R3,82bn advance book was 24.1%, which generated R919,6m in income. Added to this income was R752,4m from loan initiation and monthly fees, and R615,4m from credit life insurance premiums. This total brought the effective cost of credit to just under 60%.

Credit life can be a particularly expensive add-on and is not confined to furniture retailers. "Monthly premiums as high as R40 for every R1000 insured are charged," says Paul Slot, a director of debt counselling firm Octogen.

Steyn says Foschini does not require credit life cover.

Unfair use of credit life insurance is being taken very seriously, says deputy long-term insurance ombud Jennifer Preiss. "A report published by our office four years ago revealed startling figures on malpractice," says Preiss. Credit life is also a lucrative form of insurance, it would seem. Preiss notes: "Insurers' profit on credit life is far higher than it is on traditional life cover. We are also concerned about the way credit life is being sold."

She explains that many consumers are not even aware that they have the cover; others are unaware that they have the right to shop around for cheaper cover.

Where consumers do have existing life cover it is often rejected by a retailer because it does not provide retrenchment cover. Says Preiss: "Retrenchment cover is also often limited to six months' instalments and, in some cases, to the interest amount only."

Fortunately the end may be in sight for abuse of credit life insurance. "A joint task force from the FSB [Financial Services Board], NCR and national treasury is investigating stricter regulation of credit life," says Preiss.

Stricter control would be bad news for retailers and providers of unsecured loans riding the credit life gravy train. For many consumers buckling under the weight of expensive credit, it may just mean the difference between being able to meet their commitments or becoming yet another bad-debt statistic.

Source: Financial Mail