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SUB CATEGORIES Credit Bureaus  |  Credit Insurance |  General | 

Are consumers building a house of cards?

04 December 2012 Compuscan

According to the National Credit Regulator’s (NCR’s) Credit Bureau Monitor for the second quarter of 2012, 9.22 million consumers have impaired credit records and 19.5% of credit active consumers are three or more months in arrears. However, when Compusca

The recent Consumer Credit Market Report showed a 43.1% year-on-year increase in the rand value of credit facilities granted and a staggering 169.6% year-on-year increase in the number of unsecured credit agreements granted for agreements of six months or less. Furthermore, according to a recent research report released by the NCR, unsecured credit, which makes up 9.1 % of total credit, has increased by 49.4% year-on-year. These figures all point to the fact that consumers are under considerable financial strain in today’s economy and are turning more frequently to credit to meet their needs. Unfortunately, as their level of credit commitments rise, many consumers find themselves unable to meet their obligations and soon their entire financial structure begins to cave in.

While several consumers default on a repayment as a result of an unexpected life-event, once a consumer has missed a payment for three or more months it is an indication that he/she is experiencing signs of financial stress. However, when Compuscan examined the account profile of consumers who have at least one credit or store card account which is three or more months in arrears it appeared that not all accounts are treated equal. One would expect that a consumer who consecutively defaults on one of their accounts will most likely be in arrears on most, if not all, accounts. However, this appears to not be the case and when faced with their repayments, consumers appear far less likely to gamble with their most prized possessions – namely their home and cars.

According to Compuscan’s statistics, 70% of consumers who have at least one account that is three or more months in arrears, are still up-to-date on their mortgage repayments. In addition, 66% are also up-to-date on their vehicle and asset finance. Thus, while a consumer may be defaulting on their credit or store cards they are still meeting their secured credit obligations.

Furthermore, of those consumers who have at least one account which is three or more months in arrears only 10% are three or more months in arrears on their mortgage repayments while 38% are three or more months in arrears on their store cards. There does appear to be logic behind this as when faced with more repayments than one can manage, consumers will usually opt to repay the account with the more serious consequence for non-payment. In the case of most consumers, losing their car or home seems far more frightening than having their credit card declined or being handed over for debt collection. In addition, the average consumer is concerned with his or her public image and while one can easily hide the fact that one’s credit or store card is in arrears, one cannot as easily hide the repossession of one’s home or vehicle.

Unfortunately, the statistics also point to another frightening reality - namely that consumers are effectively using their unsecured credit to cover their secured credit commitments. Of the 70% of consumers who are up-to-date on their mortgage accounts and three or more months in arrears on other accounts, many may be using unsecured credit to ensure they can afford their secured credit repayments. This arrangement can soon become a debilitating spiral as while one’s unsecured credit commitments gradually increase so do the repayments. Unable to meet both their secured and unsecured credit obligations consumers begin to default on their unsecured credit repayments in an attempt to hold onto their secured credit assets.

Regrettably, while using unsecured credit as a means to support one’s secured credit obligations can support a consumer and his/her repayments initially – this soon becomes a very unstable structure and before long even the smallest tremor will bring the entire “house of cards” tumbling down.

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