If you are struggling to manage your budget, it may give you some comfort to know you are not alone. A higher number of South Africans using credit are defaulting on their credit cards, personal loans, vehicle finance and home loan agreements for the first time, data from one of the country’s top consumer credit bureaux shows.
“Consumers’ disposable incomes have been under even more pressure in recent months. For many, the reality is that survival in difficult economic times involves taking on more debt to service short-term needs. And in many cases, these are unsecured loans that will affect households in the long run,” David Coleman, the chief data officer at Experian SA, says.
Taking on more credit to make ends meet isn’t an option as it will only get you into further difficulties. If you are unable to earn more income, you have to cut your expenses. Borrowing more is not the solution. If cutting expenses means you won’t be able to survive through the month, then it is time to consider debt counselling.
Debt counselling is the process you start when debt has become unmanageable and overwhelming. Debt counselling is designed to help consumers who are overwhelmed by debt and who struggle to meet their monthly obligations. During debt counselling a NCR registered debt counsellors will negotiate with credit providers on your behalf for reduced monthly payments and restructuring of your debts. All your creditors will only liaise with your debt counsellor and not contact you to collect debt. One easy, affordable installment per month covers all of your debt repayment obligations.
In the first quarter of the year, the Experian Consumer Default Index increased to 3.56% compared to the previous quarter’s index reading of 3.41%. This is also up from 3.24% in the first quarter of 2018.
The index measures, on an ongoing basis, the default behaviour of South African consumers with home loan, vehicle loan, personal loan and credit card accounts. It tracks the default rate, measuring the sum of first-time defaulted balances (accounts that have never been in default before) as a percentage of the total sum of balances outstanding. Our battered economy can ill-afford another credit bubble.
On a monthly basis, lenders typically classify their consumer accounts into one of several payment categories to reflect the consumer’s level of arrears. An account is said to be “in default” when a lender deems the amount owing to be “uncollectible” due to it being in arrears for 90 or more days, or when the lender is taking action such as taking legal action, repossessing or writing-off, the credit bureau says.
South Africa had 25.85 million credit-active consumers as at the end of December last year. Almost 40% of credit-active consumers have impaired records: 24.1% are three months or more in arrears, 10.1% have an adverse listing, and 5.1% have judgments and administration orders.
The Experian index reflects the growth in number of consumers with impaired records.
The index of defaults on personal loans tracked higher at 8.74% in the first quarter of this year (compared to 8.41% in 2018) and the amount in default for the first time totalled R5.9-billion. This was higher than the previous quarter’s 8.10%, the credit bureau says.
Coleman says the quarterly increase is significant as it shows that consumers are taking on debt to fund their borrowing from the previous months. “The other product types – vehicle, credit cards and home loans – tracked by the Experian Credit Default Index showed marginal year-on-year improvements,” he says.
“Families living in rural areas, where current issues of minimum wage remain, had the worst-performing first-time credit defaults. This could also be due to the tougher economic conditions and high unemployment typically impacting outlying areas the most,” Coleman says. “As such more are inclined to continue their debt cycle to adjust to the higher cost of living and higher prices.”
Credit providers are compelled by law to assess whether you can afford to repay the credit for which you apply. The regulations under the National Credit Act provide a table showing how creditors should calculate your existing financial obligations, based on your income.
Dickerson says that while credit providers are within their rights to use the “expense norms” table in the regulations, this is only one aspect of a proper affordability assessment. Ethical credit providers should consider your actual expenses rather than the factors in the table which results in your expenses being understated and your after-expenses income overstated, he says.
If they do not, they will give credit to consumers who will default. resulting “in another credit bubble in South Africa, which we our battered economy can ill-afford”, he says.
It is never wise take on more credit than you can afford. You will soon default and this will adversely impact your credit record and your credit score. This means the next time you apply for credit, you will be charged a higher interest rate because you pose a higher risk to the creditor provider.
Ideally, you should avoid using credit for your living expenses and only use it to buy something like a home, the value of which will grow over time. And at all costs avoid taking out new credit to pay off an older debt – you will just compound your problems.