What is credit?

There is a thrill to being offered the opportunity to buy something without being able to pay for it immediately.

This is known as buying on credit. Once you start earning an income you will be offered all kinds of tempting credit.

Credit comes in many forms, but it must involve some deferral of repayment, and the credit

 provider must impose a fee, charge or interest for allowing you to pay the debt off later.

Credit can be in the form of:

• A loan – like a car or home loan;
• A hire purchase agreement – such as that for an appliance;
• A store card at a retailer;
• A credit card from a bank;
• A contract or agreement – like a cell phone contract that involves a monthly amount for airtime and possibly a repayment of the price of a phone;
• An overdraft from your bank allowing you to withdraw more than what is in your bank account;
• A bill from your doctor or plumber could become a form of credit – known as incidental credit - if you do not settle the bill immediately.

The lender is known as a credit provider. They allow you to borrow money or buy goods or services on credit.

You incur a debt and will have to repay it by way of regular repayments to which interest is added.

Credit agreements are regulated

Credit agreements in South Africa are regulated by the National Credit Act.

The Act regulates:

• The amount of interest you can be charged.
• The information the credit provider must give you in a quote before you take out the credit.
• The fees, in addition to the interest, that you can be charged to take out credit.
• The credit provider’s responsibility to check that you can afford to repay the credit.
• The credit provider’s right to insist you take out credit life insurance to cover any credit agreement, but not where you take out that insurance.
• The information a credit provider can pass on about your credit agreement to a credit bureau.
• Your right to complain to the National Credit Regulator.

Different kinds of credit

There are a few key things that distinguish one form of debt from another and knowing them will not only help you navigate how to manage this debt, but will also help you to understand which attracts more expensive forms of interest and how.

The National Credit Act distinguishes between three kinds of credit:

1. A credit facility

This is when a credit provider determines you are good for a certain amount of credit that you can use when you need to.

Examples of credit facilities are:

• An overdraft on your bank account;
• A credit card; and
• A store account.

You may be charged a monthly fee to enjoy this credit facility but the interest is charged on the outstanding amount when you use it.

If you have a credit card but do not spend on it, for example, you may pay a fee for the credit facility and an annual card fee, but you will not pay interest until you make purchases. The interest charged will depend on the terms of your agreement, how much you repay and when.

2. A credit transaction

Credit transactions cover credit granted to buy or lease something, such as your home, your car, or appliances. You agree to repay the credit over a period of time and to pay a specified amount of interest.

Credit transactions also cover what is known as incidental credit which covers things like a doctor's bill or university fees.

Transactions where you are offered cash or credit in exchange for leaving your goods at a pawn shop, are also regarded as credit transactions.

Credit transactions may be secured by the asset you are buying – such as a home loan or vehicle finance. Secured credit is usually granted at a lower interest rate than unsecured credit, as you agree to the asset, such as your house or car being security for the loan. This gives the credit provider the ability to repossess that asset to recover what it lent to you should you default on the repayments. 

Personal loans and microloans are examples of unsecured credit, which is typically granted at a higher interest rate and over a shorter term than secured credit. 

3. A credit guarantee

A credit guarantee arises when someone undertakes to, on demand, meet any obligations of a borrower under a credit facility or a credit transaction. It arises when you issue a letter of credit or stand suretyship for the credit taken out by another. For example, if you agree to make good the repayments on a student loan taken out by your child, you are providing a credit guarantee. 

Unregistered credit providers

You may also come across some unregistered credit providers who offer you loans without adhering to the terms of the National Credit Act. Informal lenders, such as mashonisas and loan sharks are often not registered.

Be aware that if you take credit from these providers they may:

• Charge fees and interest beyond that provided for in the Act;
  
  
• Use illegal collection methods – for example, retaining your bank card or social security card or threatening you;
  
  
• They are unlikely to check that you can actually afford to repay the credit or to check your credit report; and
  
  
• They may trap you in a debt cycle by offering further loans to pay off existing ones, all at very high interest rates compounding to your disadvantage.

Credit agreements beyond the National Credit Act may be declared invalid by a court, but getting to that point may create a lot of stress for you.

Informal loans from friends and family are not regulated but can also create tension in your relationships.