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Resist credit this festive season

27 November 2009 South African Savings Institute

As the excitement of the festive season begins to gather pace, the South African Savings Institute (SASI) continues to urge South Africans to approach the festive season with caution and avoid breaking their budgets.

The institute says the current low interest rate environment should not be viewed as an incentive to overspend and accumulate unnecessary debt, but rather use this stance as an opportunity to service existing debt.

While the economy is beginning to show signs of a recovery, the reality is that some companies continue to lay off workers in an effort to keep their heads above the water. Uncertainty around job security makes it crucial for consumers to adopt a disciplined approach to their spending habits.

“The risk of buying on credit in an environment where job security remains uncertain is that, individuals may not be able to service their debts if they lose their jobs. In such a situation, one runs the risk of not only losing the assets bought on credit, but also being blacklisted and being unable to honour other commitments,” said SASI CEO Elizabeth Lwanga-Nanziri.

The National Credit Regulator’s (NCR’s) credit monitor shows that the number of consumers with impaired records increased to 7.85 million at the quarter ended June 2009. This implies a deterioration in the credit records for 390 000 consumers in comparison to the last quarter and 1.06 million year-on-year, reflecting a further increase in the level of debt-stress.

Some of these debt stressed consumers are likely to have lost their hard earned homes, cars and many other valuable assets because of debt, which could have easily spiraled out of control.

The trend of the consumers with impaired records has been on an increase since June 2007. The NCR monitor shows that there were 121.46 million enquiries made on consumer credit records during the June 2009 quarter. This was an increase of 23.4% quarter-on-quarter. Of the total enquiries made on consumer records, enquiries from banks and other financial institutions accounted for 39.4%, enquiries from retailers accounted for 14.2% and enquiries from telecommunications providers accounted for 23.7%.

Cash versus Credit

While credit cards are a very convenient and secure form of payment, consumers are encouraged to use cash when making their festive season purchases and avoid impulse buying on credit.

Most of the spending incurred during the festive season is on intangible purchases such as holidays

and entertainment, which do not contribute to one’s assets. Such purchases, when made on credit, often translate into unnecessary debt that ends up costing the consumer more than what they could have paid in cash.

“As part of our Festive Season Campaign, we urge consumers to exercise personal restraint when it comes to spending as this is the most important aspect of good personal finance. Buying in cash, for instance, ensures discipline as it limits spending within the available funds, while purchases on credit give a false impression about one’s levels of affordability,” said Lwanga-Nanziri.

She said that, while large purchases such as buying a house and a car may require the use of credit, consumers still need to exercise restraint and shop around for better rates of servicing their debt. “Consumers need to ensure that they can afford the debt repayments.”

“Cash is King. Having cash in hand gives one high bargaining power. An individual may pull off a cash payment discount. There are no interest payments or any other charges on cash payments. One does not have to worry about outstanding payments, and is free to enjoy his/her purchase”, she added.

All consumers should review the need to for getting into debt before committing. Where debt is unavoidable, one should ensure that that it is affordable and yields positive returns. Once in debt, one should pay it off as soon as possible to minimize overall cost of the credit, encourage saving and lead to accumulation of assets.

Avoid debt stress

Unnecessary debt accumulated during the festive season could have a negative impact on the consumer’s ability to honour their financial commitments in the New Year. Consumers with school fees and bond repayments in particular need to exercise extra caution because post season financial stress becomes a huge reality in the New Year.

SASI reiterates that consumers should instead use the current low interest rate environment to service their expensive debt instead of amassing fresh debt. With electricity prices likely to go up next year, inflation remains a very sticky point in the South African economy, with the possibility of an increase in interest rates looming large.

“Consumers need to avoid spending money that they do not have and realize that being debt free is very liberating,” said Lwanga- Nanziri.

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