HOW TO BEAT DEBT

Wors­en­ing macroe­co­nomic con­di­tions may con­trib­ute to poor credit be­hav­iour by con­sumers. How do you get rid of debt?

Finweek English Edition - - FRONT PAGE - By Buhle Nd­weni ed­i­to­rial@fin­week.co.za

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

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