Credit where it isn’t due

Peo­ple sim­ply bor­row more so as to con­tinue to spend

Finweek English Edition - - Creating wealth - BY ADRI­AAN KRUGER adri­

GE­ORGE WON­DERS IF the new rules and reg­u­la­tions gov­ern­ing the ex­ten­sion of credit will have an ef­fect on peo­ple’s ad­dic­tion to shop­ping. If you think that the ag­gres­sive of­fer­ing of credit to ev­ery Tom and Dick borders on in­san­ity, then you’d prob­a­bly also think that the con­tin­u­ing spend­ing spree is in­sane.

“It wasn’t easy to lay the blame for high in­debt­ed­ness at the banks’ doors, but at the end of the day it’s the con­sumer who signs the in­stal­ment sales agree­ment and of­fers his credit card at the till,” Ge­orge ex­plains to his niece. She had just re­ceived her first state­ment from her credit card di­vi­sion and is look­ing a bit pale. It wasn’t dif­fi­cult to run up a few thou­sand rand worth of debt in the three weeks since she got her credit card. A new pair of Le­vis, a few CDs and a lunch at Mugg & Bean added R2 000 on to the credit card within a few hours.

Ask the guys at the SA Re­serve Bank: to­tal credit card debt in­creased to nearly R40bn at end-Septem­ber 2006. The Bank’s new Quar­terly Bul­letin is due within days, and will prob­a­bly show that debt in­creased fur­ther.

To­tal credit card debt in­creased by R1bn/ month since the be­gin­ning of 2005. For those who’ve forgotten, so R1bn is R1 000m. That means that South Africans add R31m to credit card debt ev­ery day, in­clud­ing Sun­days and pub­lic

hol­i­days, be­cause shops are al­ways open.

To­tal debt, in­clud­ing mort­gages, in­stal­ment sales and leases, credit cards and other debt in­creased by more than 140% over the past five years, from R361bn at the be­gin­ning of 2002 to R878bn at Septem­ber 2006.

No­body can blame SA Re­serve Bank Gov­er­nor Tito Mboweni when he says peo­ple are get­ting into too much debt in or­der to buy stuff they don’t re­ally need. He’s warned time and again that the strong de­mand for con­sumer prod­ucts will even­tu­ally start to push in­fla­tion higher and put more pres­sure on in­ter­est rates. It’s clear that con­sumer spend­ing is keep­ing the de­mand for credit strong. The most re­cent fig­ures from Sta­tis­tics SA show that re­tail sales are still grow­ing fast – by more than R1bn/month. Re­tail sales in­creased by 15,5% dur­ing 2006. Re­tail sales are grow­ing twice as fast as five years ago.

The growth in con­sumer spend­ing and credit ex­ten­sion has been stim­u­lated by lower in­ter­est rates and eco­nomic growth in gen­eral, as well as the strong in­crease in value of fixed as­sets, such as houses. On the one hand, it strength­ened peo­ple’s bal­ance sheets and so they could bor­row more money. How­ever, it also forced peo­ple to bor­row more so as to be able to af­ford more ex­pen­sive as­sets.

The in­crease in in­ter­est rates that took SA’s prime over­draft rate from its low of 9,5% to the cur­rent 11,5% doesn’t seem to have tem­pered any of our lust for shop­ping, even if we have less money to spend. The in­crease in in­ter­est rates costs us R1,3bn/month more in in­ter­est just on our mort­gages. That’s money we could, and did, spend 18 months


It seems that peo­ple sim­ply bor­rrow more to con­tinue spend­ing – and pos­si­bly with­out al­ways know­ing the ex­act cost of the debt.

Ge­orge re­ceives a let­ter ev­ery other week from a bank to of­fer him a per­sonal loan or to in­crease the limit on his credit card. Sev­eral para­graphs wax lyri­cal about how easy and con­ve­nient it is to have an­other R25 000 to spend. It will be paid into your bank ac­count within 24 hours. There are even a few pho­to­graphs of happy cus­tomers, smil­ing from ear to ear be­cause they could go on hol­i­day or have a party to cel­e­brate their daugh­ter’s birth­day.

But such let­ters are quite vague con­cern­ing the in­ter­est rate or any ad­min­is­tra­tive costs. That’s what the new Na­tional Credit Act wants to change. The Act aims to counter the ir­re­spon­si­ble ex­ten­sion of credit by forc­ing fi­nan­cial in­sti­tu­tions to ex­plain – in clear and un­der­stand­able lan­guage – the terms and con­di­tions of debt agree­ments. In fu­ture, ad­ver­tise­ments would have to con­tain pre­scribed facts and fig­ures show­ing the cost of the debt and not merely the in­stal­ment.

Au­to­matic in­creases in credit lim­its – such as the one that in­creased Ge­orge’s credit card limit from R40 000 to R95 000 – will be reg­u­lated. Banks will also have to en­sure that clients can af­ford the debt.

Prob­lems with debt aren’t lim­ited to SA. Sim­i­lar con­cerns about the in­debt­ed­ness of Amer­i­cans have re­cently pushed fi­nan­cial shares on Wall Street lower. In some cases, US lenders of­fered bor­row­ers loans with­out them hav­ing to com­plete a full ap­pli­ca­tion or sup­ply proof of in­come. Ad­min costs are in­cluded in the cap­i­tal and in­stal­ments lim­ited to in­ter­est only.

Con­cerns are that house prices in the US could fall fur­ther and bank­rupt those bor­row­ers, as well as the lenders.

The pre­scrip­tions in SA’s new Na­tional Credit Act will hope­fully help peo­ple to be more in­formed and act more re­spon­si­bly. At the same time, bor­row­ers need to ac­cept re­spon­si­bil­ity for their ac­tions.

“Just think,” Ge­orge tells his niece, “if you had no debt, your whole salary would be yours ev­ery month.”

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