Increase in unsecured debt is cause for concern

Increase in unsecured debt is cause for concernOver 6 million applications for credit were turned down in the second quarter of this year, according to the latest Consumer Credit Market Report.

In comparison to the same period last year, the number of new credit transactions and facilities opened decreased by over 7%. This is not because South Africans are managing their money better or weaning off their credit dependency – in fact, it’s  just the opposite. Although there was an increase in the number of applications, of the 11.3 million credit applications received, 55% were turned down, mostly due to affordability, according to Mr Ngoako Mabeba, Manager: Statistics and Research at The National Credit Regulator.

Cowyk Fox, Managing Executive: Absa Everyday Banking says the rejection rate is mainly a reflection of affordability constraints and impaired credit records. “Against the background of a strained macro environment, these two factors have been deteriorating in 2019. Essentially, South Africans have less disposable income and find it more difficult to cover debt repayments, which in turn influences their credit rating negatively. As a result, the decline rates increase, even if the underwriting criteria remain unchanged.”

The credit report reflected the increasing deterioration of customers with healthy credit scores. In the second quarter of the year the number of consumers in good standing fell by 677 026 to 14.87 million of the 25.1 million credit active consumers. A customer in good standing is either up to date with their payments or only one or two payments behind.

Increase in impaired credit records

When looking at the year-on-year figures, consumers with impaired credit records – in other words, those who are three months or more behind or with adverse listings – increased by over 2 million. There are now over 10 million credit-active households that are indebted – effectively defaulting on one or more accounts.

The recent amendments to the National Credit Act allowing for a Debt Relief Bill would also have an impact on new credit applications, especially for those earning R7 500 or less per month. With concerns that the Debt Relief Bill would result in these consumers having their debt expunged, many credit providers have cut back on their lending to this segment.

Despite the rejection of applications, South Africans still managed to borrow an additional R134.7bn between April and June 2019.

South African households currently owe R1.9 trillion in debt – that is equivalent to the national government budget. Currently mortgages make up the bulk at R900bn followed by asset-backed lending such as car finance at R435bn.

What is a concerning is that the trend is towards more lending happening in the unsecured space. Of the R134.7bn of new credit that was granted from April to June 2019, credit facilities, unsecured credit and short-term loans accounted for R52bn, secured credit (vehicle finance) R41bn and new mortgages only accounted for R40bn.

Considering that mortgages are far higher value lending items, this shows that the vast majority of South Africans are borrowing for consumption-driven, short-term needs, rather than borrowing to create wealth through asset acquisition.

Despite having 25 million credit-active South Africans there are only 1.7 million mortgages and 3.4 million with secured credit. In theory this suggests that double the number of people own a car than own a home.

Credit facilities – this includes credit cards, overdrafts and store cards – make up 26 million accounts and account for R249bn of South Africans’ debt. In comparison there are only 5.6 million unsecured loans, making up R205.6 million of total outstanding debt.

Credit facilities are one of the worst culprits when it comes to over-indebtedness. A credit facility acts as a revolving credit line where there is no “paid-off” date. This traps people into a cycle of living off credit indefinitely. Unsecured loans are easier to manage as they are fixed-term loans and tend to be more goal orientated. When someone takes out a fixed-term loan they have a clear idea of their monthly instalment and the date when the loan will be paid off.

What is particularly concerning is that people earning less than R10 000 account for over 58% of credit facility accounts. Christoph Niewoudt, CEO of FNB Consumer Segment, says the majority of credit facilities offered to the lower-income segment is made up of store cards.

“Retailers have relatively high margins on clothing and can afford to take the risk of higher defaults.” In comparison this segment makes up only 35% of fixed-term, unsecured debt which is easier to manage.

If you are one of the 10 million South Africans facing the debt pinch, start by cutting those credit facilities and closing them. If you must borrow money, rather select a loan with a specific time period so you know exactly how much the debt is costing you and when you will be debt free.

How to manage your credit

Cowyk Fox, Managing Executive: at Absa Everyday Banking, put together these tips on how to manage your credit.

Pay your instalment via debit order

The best way to avoid falling behind on your payments is to elect to repay your loan via debit order. You can align your debit order to “go off” as your salary comes in, giving you peace of mind that your debt commitments are taken care of upfront. Also, set up personal payment reminders to help you budget appropriately throughout the month – this way there will be no unexpected surprises.

Reduce the amount of debt you owe

Put together a budget to help you manage your monthly expenses, and ensure you can pay all your monthly debt commitments.

  • Regularly pay off your credit card.
  • Make a list of all your accounts and check how much you owe on each account and what interest rates you are being charged.
  • Don’t miss your monthly payments or payments due – to improve your credit score you must pay your accounts on time.
  • If you have spare cash, pay off your debt.
  • Request and negotiate a better payment plan from your creditors.
  • Consider consolidating your loans into a single, more manageable loan/credit facility to ease the pressure.

Dont exhaust your credit facilities

Most financial institutions score you on the extent of use of your credit facilities such as a credit card and revolving personal loan, amongst others. The extensive use of such facilities can negatively affect your credit score.

Dont miss payments

Missed payments have the greatest negative effect on your credit score. When taking on a loan, review your debit order mandates carefully. Ensure that your debit order start dates and repayment amounts are correct and plan accordingly. A missed instalment creates a lot of pressure on your budget and is damaging to your credit score. More often than not, this can be avoided with proper planning.

Taking responsibility now to improve your repayment history will help you to improve your future credit score.

Monitor your credit record

With cases of fraud and identity theft rampant in the country, it is wise to keep track of your credit record, and doing this a few times a year could ensure that your record (against your profile) is accurate and correct. If incorrect information is displayed, you can dispute the information via one of the available credit bureaus; this is usually free. They can remove false claims from your record.

Quite often, debt consolidation, which is available at most institutions, is a good option for customers trying to manage debt smartly. Avoiding first payment default is also very important. It is imperative that customers understand how to go about making a first payment on a new facility – many tend to forget about this, which can lead to a first payment default.

What debts do we prioritise?

TransUnion conducted research into our payment hierarchies in order to understand which loans we prioritise in difficult financial times.

Conventional wisdom would suggest that the first lines of credit we would stop paying would be our credit cards followed by our car and only in the most dire circumstances would we stop paying our home loans. Yet when they conducted their research, they found that consumers acted in a very different manner.

Although credit cards were the first payments to be skipped, consumers prioritised their car repayments over their home loan.

In some ways this is actually a rational decision. Firstly a car repayment is usually lower than a mortgage repayment, so it could be easier to keep that instalment active. A car is very important in providing transport to work – the loss of a car could result in the loss of income. Consumers also know that it takes much longer for a bank to repossess a house than it would their car. Due to the speed at which a car devalues, a bank would initiate a repossession within a few months of non-payment. However, evicting someone from their home can take years to complete. Furthermore, due to the growth nature of property, it is easier to restructure your home repayments than it would be for your vehicle.

This article first appeared in City Press.

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