South African consumers stuck in rising debt trap

According to the Credit Bureau Monitor’s 2011 4th quarter report, only 10.41 million of the 19.34 million credit-active consumers in South Africa are classified as in good standing. The report reveals that the number of consumers with impaired records inc

According to Henry van Deventer, Financial Planning Coach at acsis, these increasing levels of debt are extremely worrying for a country like South Africa, which has a very high unemployment rate. He also points to the Reserve Bank’s Quarterly Bulletin, which recently reported that household spending rose 5% last year, the strongest annual increase since the 5.5% recorded in 2007 before the start of the global recession. Van Deventer says that the rise in spending and increased debt can potentially result in financial disaster for consumers.

He says that consumers who are caught up in revolving debt know firsthand of the damage that can result. “Calls and letters from creditors are only part of the problem. Each monthly payment not made in agreement with the credit card agreement causes damage to a consumer's credit record. In addition, finance charges, late charges and over-limit charges combine to actually increase the size of the debt each month.”

Van Deventer warns that many consumers in this situation are not aware that they have impaired credit records, or are in this position as a result of “minor” infringements. “Nevertheless, the result is often the same - a bad credit rating or an adverse listing can seriously hinder a consumer’s credit record going forward, which can affect many financial transactions.

“When providing finance to consumers for a vehicle, home loan or a personal loan, banks look to ensure that their investment is safe. To increase the chance of securing finance, consumers should ensure that a clean credit record is kept at all times.”

He also advises that consumers know the difference between ‘good debt’ and ‘bad debt’, and how to avoid the bad kind. “Good debt is usually investment debt that creates value; for example, student loans, home loans and business loans. The purchase of disposable items or durable goods using high-interest credit cards and not paying the balance in full at the end of the month is known as bad debt.”

Van Deventer explains that debt is often a continually-worsening spiral that consumers cannot control and then get stuck in. “Once in it, escaping the vicious cycle of debt can be daunting. It is therefore important to seek impartial and professional advice at an early stage if debt problems do arise. Debt levels need to be controlled from the beginning, as often debt can become unaffordable if there is a change in circumstances, such as the birth of child, unemployment or divorce.”

He recommends the following tips to keep a healthy credit score:

~ Ensure that monthly debt repayments are made on time. Even a payment that is only 24 hours late can be bad for a credit rating;

~ Always pay the minimum instalment required;

~ Pay your most ‘expensive’ debts off first. These are the accounts charging the highest levels of interest, such as clothing and furniture accounts;

~ Close accounts not in use. Credit providers assess the full facility of the credit agreements on record, even if they are not being used.

~ If possible, pay more than the minimum payment on accounts to further improve your credit standing;

~ Don’t ignore a letter of demand. Always be proactive and take appropriate action;

~ If you simply cannot make payment on all your outstanding accounts, you can speak to a debt counsellor that will negotiate on your behalf for revised terms on settling your outstanding debt.