HOW TO MANAGE CREDIT RESPONSIBLY
MIDDLE-INCOME consumers on average spend 25 percent of their take-home monthly income to pay interest accumulated on debt.
This is according to FNB’s analysis of money management behaviour of our retail banking customers who earn between R7 000 and R60 000 a month. Money management is your ability to adequately allocate income to meet short, medium and long-term financial commitments and goals.
The data paints a picture of households that are heavily reliant on unsecured debt to get through each month.
Consumers who have not defaulted on a credit repayment in the past 18 months show better money management.
Here are some important guidelines on managing credit:
◆ Pay off your debt: There is no getting away from this step: to get out of the debt cycle, you must cut back and get rid of unnecessary credit. There are a couple of ways to approach this. The first option is to pay off smaller debts/loans first. Once these are paid, you can redirect payments towards bigger credit obligations. Alternatively, you can prioritise paying off debt with the highest interest rate first. This will also help to save on interest over the long-term.
◆ Consider debt
consolidation: This enables you to consolidate your qualifying debt from various credit providers into one convenient and affordable longterm repayment.
◆ Manage your credit record:
When credit providers assess your credit worthiness, they look at your overall behaviour of how you manage credit. Whether you have missed a payment on a store card, furniture retailer account or a registered micro-lender – it is all recorded on your profile.
◆ Avoid taking on unnecessary new debt: Taking on new debt when you have excess cash flow can be tempting but it’s important to resist slipping back into a debt trap. This is your opportunity to prioritise building a savings kitty for emergencies or for a deposit to invest in an asset like property, which can generate long-term value.
◆ Use credit to improve your future prospects: An analysis of our customers’ earnings shows that education is a major driver among customers who seek unsecured credit, and this generally adds significant value to long-term earnings prospects. Transportation is another key factor, therefore using vehicle finance to buy a car for personal or business use is significantly less expensive than using an unsecured loan for this purpose. Last, property is the largest driver of savings for a proportion of households, hence using a mortgage to purchase property saves you from paying escalating rentals. Instead, your instalments remain fixed while the value of your investment will grow over time.
Access to credit remains a vital asset for a consumer and has been a gateway to financial inclusion for most people. Unsecured credit can be an important buffer when household budgets are not sufficient to cover unforeseen expenses. However, we caution consumers to avoid being heavily reliant on unsecured credit for day-to-day consumption as this limits their ability to employ good money management practices such as saving for financial goals or investing for the long term.