Credit where it isn’t due
People simply borrow more so as to continue to spend
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.”