HOW TO BEAT DEBT
Worsening macroeconomic conditions may contribute to poor credit behaviour by consumers. How do you get rid of debt?
the recently released Consumer Credit Index (CCI) for the first quarter of 2016 by credit bureau TransUnion indicates that the credit health of South Africans is at its lowest in three years.
The CCI declined by six points to 46.1 from 52.1 in the final quarter of last year mainly due to household debt service costs. According to the CCI, credit defaults by consumers rose by 1.8% year on year.
Geoff Miller, TransUnion CEO, says households’ credit situations have deteriorated since recent increases in the repo rate (by 75 basis points since November). Food price inflation and recent petrol hikes also mean consumers have to cough up more for everyday goods, and for sustenance.
“That has led to less consumers being able to pay their bills,” he adds.
While local consumer credit health has not reached global financial crisis lows, Miller warns that consumers should be aware of their own financial situations and “be wary of taking out non-essential credit to buy luxury items or nonessential goods”.
“Those who have mortgage bonds have to pay more than they did in the past. The same with vehicle asset finance,” he explains. “Our views are that consumers will remain under strain for the remainder of the year.”
The index indicates that retail credit markets are tightening their credit standards to brace for a tougher economy.
“Retailers have remained fairly resilient,” says Miller. “There was new legislation that went into effect around September last year around affordability and document requirement when a consumer applies for credit.”
This meant retailers would require three months’ bank statements and a payslip. Not many consumers walk into the store with those physical documents, explains Miller, resulting in fewer applications coming through the system.
Good versus bad debt
In order for consumers to change their credit behaviour they need to be able to differentiate between good and bad debt.
Certified financial planner at Old Mutual, Sydney Sekese, says if you use debt as a part of your bigger wealth-creation strategy, it will increase your level of credit worthiness.
“Good debt would be when you take out a bond in order to buy a house, because in the long run you will save on rent. And you will have a good asset that increases in value over time,” he explains. Depending on the purpose, a personal loan could also qualify as good debt, if, for example, it is used for future studies. “But if it’s for an overseas trip it’s a bad debt.”
Odetta Sekoko, financial adviser at Liberty explains that a home loan, for instance, while a big debt, will result in appreciation in value. Therefore it is rather seen as an investment.
Bad debt, on the other hand, depreciates in value, says Sekoko.
Comparing a car to a house, in terms of valuation of that asset, car financing would be seen as bad debt because over time the value of your car depreciates. It could become a good debt if it’s repaid over a short period of time, says Sekese.
Bad debt includes buying groceries on your credit card. “You can do that, provided you repay the full outstanding balance soon because they are perishable goods,” says Sekese.
The Consumer Credit Index (CCI) declined by 52.1six points to 46.1 from in the final quarter of last year mainly due to household debt service costs.
Sydney Sekese Certified financial planner at Old Mutual
Odetta Sekoko Financial adviser at Liberty
Geoff Miller CEO of TransUnion