SA consumers have racked up a massive R1.9 trillion in debt

South African consumers reportedly owe a total of R1.9 trillion – more than R260 billion of which was unsecured credit for retail accounts, personal and payday loans and credit cards.

According to the National Credit Regulator’s latest credit report, about R959 billion of this massive debt bill is for loans.

Herman Lombard, founder and executive director of financial service provider African Unity, said the debt crisis showed the need for financial literacy and cautioned that consumers should avoid falling into the debt trap.

Lombard said people, especially the youth, should learn to work on debt responsibly.

“There are different kinds of debt. There’s the good, the bad, and yes, really, the ugly. It is vital consumers know the difference.”

He said good debt came in the form of loans that allowed consumers to accumulate value, such as to buy property, improve homes, study or run a small business.

“Home renovations add value to your property, so it’s a good investment. A student loan allows you to get an education and increase your long-term earning potential, while a small business loan can help you set up or expand your business.”

Bad debt, however, was incurred by acquiring consumable items with a short lifespan, such as clothing and retail accounts, dining out, expensive holidays and vehicles, which immediately decrease in value upon purchase.

Most credit card transactions are considered bad debt, since they accrue large amounts in interest.

“Look at what you can afford and limit your monthly spending to below that amount,” Lombard said. “You need to pay back the debt in full every month. A credit card can, however, be a useful financial tool for building a good credit rating if you can illustrate a good track record for settling your account on a monthly basis.”

Meanwhile, a leading economist blamed failed state-owned enterprises (SOEs) and the stagnant economy for the fact that millions went to bed hungry each night.

Efficiency Group chief economist Dawie Roodt said the majority of people in poverty were not social grant recipients, 59% of whom were unemployed young people.

Roodt said it was likely the situation would deteriorate further, with the likelihood increasing of a downgrade from rating agencies. He predicted Moody’s would downgrade the economy to junk status next month, considering that SOEs’ financial troubles were worsening.

“If there was any doubt that Moody’s would downgrade South Africa’s sovereign debt to subinvestment grade, the latest figures from Eskom’s financials that showed the SOE was bankrupt could be the deciding factor.

“The moment the government and its SOEs have to pay more for borrowed money, it has no option other than to pass the increased borrowing costs on to the consumer.”

He said this meant prices would go up and consumers would become indebted.

In July, Fitch rating agency put the country at a negative noninvestment grade, while Moody’s rating in March was a lower grade.

Debt Rescue CEO Neil Roets said consumers were in for a very rough ride, with nowhere to turn for relief, as they faced higher prices on necessities. He said that the tough financial times were pushing more consumers to buy necessities like food on credit, leaving many in debt.

“Although many of us have already reached the point where there is nothing left to cut, we are going to have to adapt our lifestyles to adjust to tighter market conditions by doing more with less.”

– sinesiphos@citizen.co.za

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