How Covid-19 changed the way we pay our debts

How we change the way we pay our debts in times of crisis, such as the Covid-19 pandemic, often provides a clearer view of how consumers are meeting the financial burdens they face.

In South Africa our payment behaviour changed to prioritise paying credit card debt rather than personal loans.

According to a new TransUnion Global Payment Hierarchy study, the Covid-19 pandemic had a pronounced effect on how people paid their debts. In South Africa, these changes were prominent across multiple credit products, with an increased general priority to pay credit card debt that overtook personal loans, a trend not seen in the other global markets studied.

“TransUnion has tracked payment hierarchy dynamics for a number of years in South Africa and has looked at how global and localised financial challenges have had an impact,” says Carmen Williams, director of research and consulting for TransUnion South Africa.

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This study is unique because it highlights how and why payment dynamics changed in South Africa and other countries as a result of the pandemic, a global crisis that has affected consumers globally. TransUnion analysed and compared trends for wallet profiles that are popular across the countries studied, that included Canada, Colombia, India and the US.

The country-specific study observed consumers with one or more credit cards and at least one personal loan with no delinquencies reported.

Credit card debt versus personal loan debt

In Canada, India and the US, consumers prioritised paying personal loans if they had multiple credit cards. Colombian consumers showed no clear prioritisation of either product until March 2020, when personal loans became more important.

However, in South Africa, there was a flip in priorities during the pandemic as local consumers considered credit cards more important than personal loans, reversing the pre-pandemic hierarchy in favour of personal loans. As lockdown restrictions continued, consumers moved to digital transactions where credit cards became critically important to pay with.

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Younger people were most instrumental in this flip, with millennials leading the shift well before the onset of the pandemic. The reversal already happened in April 2019 for Millennials, becoming even more pronounced during the pandemic.

This change in how we pay was mostly driven by increased use of online transactions, which generally require a credit card, as well as the digital know-how and receptiveness of younger consumer segments to pay online.

Another interesting dynamic in South Africa and other countries was that people rather paid their credit card debt if they had only one card and one personal loan. In South Africa, where the group who had only one credit card made up about 68% of the study population, the delinquency spread in favour of credit cards widened during the pandemic compared to pre-pandemic levels.

Cash not king any more

“Cash was clearly not king during the early parts of the pandemic when millions of people opted to use their credit cards for digital transactions from the safety of their homes for groceries, clothes or other everyday items,” Williams says.

These findings were supported by a global behavioural survey of 2,667 consumers who had credit products in South Africa, Brazil, Canada, Colombia, Hong Kong, India, the UK and US. When consumers across these regions were asked what they would choose to pay first, it was clear that a secondary credit card is the first payment they are likely to miss.

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Only 26% of South African consumers are likely to prioritise the secondary card payment, compared to 37% who are likely to pay their primary card, while another 37% would pay personal loans first. More than half (53%) of global respondents with a credit card said they expected to receive a call from their lender if they missed a payment.

In South Africa, 74% of credit card holders and 74% of consumers with personal loans said the consequence of a missed payment would be a lower credit score.

South Africa: home loan debt top priority  

South African consumers with vehicle finance, credit cards, personal loans and home loans, pay home loans first before paying vehicle debt and personal loan debt, with card debt in last place.

Before the pandemic, consumers first paid their vehicle financing debt, but this was flipped in favour of home loans at the onset of the pandemic. The delinquency spread, that refers to the difference between the 30+ days past due rate at 12 months for vehicle financing versus home loans in the wallet, widened to 1.9 percentage points in favour of home loans in Q3 2020, versus -0.2 percentage points in the Q3 2019 observation.

Consumers with higher value in their properties over and above their home loans or other liabilities, were also more likely to first pay their home loan instalments than consumers who had less value in their properties.

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“The risk of losing your vehicle or home appears to be driving consumer payment choices,” Williams said. The dynamics of the pandemic affected consumer choices in favour of home and vehicle loan payments.

Implications

The ongoing TransUnion research on payment hierarchy has three clear implications for lenders:

• Lenders need to identify their customers’ payment hierarchy to better manage consumer expectations and portfolio trends to leverage this approach
• Consumers who are loyal to their lenders tend to pay them first
• A need to accelerate the digital ecosystem in the credit markets.