Creating Healthy Credit Habits - An Essential Practice for Cash-strapped Consumers

1 May 2021

Creating Healthy Credit Habits - An Essential Practice for Cash-strapped Consumers

1 May 2021

The economic effects of the Covid-19 outbreak have almost ruined the economy. South Africans experienced the impact of high unemployment rates, significantly reduced income, businesses being shut down and life savings being depleted. In addition, the prices of all essential goods and services such as food and fuel continued to increase, all to the detriment of already cash-strapped consumers.

Many prominent South African businesses such as Edcon, Kulula Airline, Associated Media Publishing, Phumelela Gaming and Leisure, Pretoria Society of Advocate, Time Freight, Rebel Tech and popular restaurants and bars, all of which provided employment to thousands of people, have not survived the lockdown (Business Insider SA: 2020).

With the rise of the third wave of Covid-19, South Africans should make a conscious and well thought out decision on how they intend on managing their accounts, their credit cards, servicing their loans, and settling their debts.

While the government is also under exceedingly difficult economic times investing to get the country’s economy back on track, most South Africans, including the rich, middle income and poor, are struggling to survive financially.

FNB Retail Chief Executive Raj Makanjee advises that the accepted best practice in becoming financially resilient is having emergency savings available that is equal to at least three months’ worth of income or take-home pay, which can be a lifesaver if an unexpected situation arises, like a retrenchment or temporary loss of income.

Very few South Africans have emergency savings
Bernadette Felix, director of FTRC, points out that “during the national lockdown, one of the greatest lessons that should have been learned by consumers is that debts and loans provide financial leverage and help in times of need, however, it can also be a drawback when repayments exceed your budget, more especially if you do not have savings to rescue yourself financially”.

Most financial institutions are making a concerted effort to educate their consumers about the dangers of overspending and the rising debt. For example, Nedbank held a live street exhibition in Sandton Drive, Johannesburg in May, to draw attention to the reality of overspending and irresponsible borrowing, as well as the urgent need to save and invest for the long term ( 2021).

Furthermore, First National Bank (FNB) conducted internal research on its middle-income customers who earned between R15 000 and R42 000 per month and the findings are as follows:

  • more than 80% of middle-income customers have no, or limited savings that they can access within 7 days in case of an emergency,
  • around 27% have no emergency savings,
  • 56% have savings that is less than one week’s worth of take-home pay,
  • less than 6% have emergency savings that would see them through a loss of regular income for three months or longer,
  • customers with low or no savings tend to be spending more on discretionary items like travel, holiday accommodation and liquor,
  • lower savers tend to spend more on servicing unsecured debt, like retail loans and credit cards, than customers who are saving more, and
  • savings are not necessarily determined by income levels, instead the everyday decisions consumers make on spending or how much debt they take have a big influence on their savings levels or ability to be financial resilient ( 2021).

While the FNB research focused on the middle-income group, Experian’s Q4 Consumer Default Index reported that over-indebtedness is not limited to low- or middle-income households and that new default balances in Q4 2020 amounted to R18.26 billion, with the bulk of this being among the most affluent segments of the population that have an outstanding debt of almost R600 billion (Experian Q4 2020).

Manage your debts while saving

The sensible approach to pay your debt is to establish a realistic budget for your monthly expenses. Decide on a set amount to save in a separate bank account no matter how small and gradually increase the amount that you can afford.

Over the course of a year, expenses like car and house maintenance, insurance, as well as unexpected financial emergencies, can add up to significant amounts. If you do not save deliberately from your monthly salary to pay for these expenses, you will most likely keep using your credit line to deal with them (www. 2021).

Develop the right skills, be patient, and disciplined to spend on what you need, pay off debts and save.

Saving money every month supports you to build healthy financial habits while prioritizing your debts, credit cards, loans, and mortgages. Therefore, FRTC recommends that the approaches described below should be considered for how to manage your debts and loans while saving.

Borrow or use credit cards for the right reasons
Good debt is when you borrow money to buy an asset that will increase in value over time. For example, home loans are good debt, since you will have a property which is an asset.

Bad debt is when the money is used to buy something that decreases in value or makes you lose money. For example, a credit card purchase may be an unnecessary payment or expense. You may want to differentiate between a ‘need’ and a ‘want’, as this may guide you in how you use your credit card for purchases.

Gerald Mwandiambira, Certified Financial Planner for Sugar Creek Wealth explained on Cape Talk that having a car loan works against you when applying for a home loan. A home is an appreciating asset, and it is a much more secure loan from the bank’s point of view. A car depreciates in value, whereas your house appreciates in value. Therefore, home loans are easier to apply for if you don’t have a car loan (Roux, 2021). In fact, you can also ensure your home (asset) to obtain a loan for any emergencies, but this should be an ‘emergency’. You should not be tempted to satisfy your ‘wants’ by obtaining a loan against your fixed property.

Borrow or use credit cards only for what you need.
If you need R50 000 to start a small business, then borrow only that amount or use only that amount on your credit card even if you qualify for a higher amount. Avoid the temptation of exhausting your credit line as you may need funds for unforeseen emergencies, such as health expenses. Do not fall into the trap or temptation of taking up offers of a credit card if you are

not disciplined when it comes to using funds. Many banks offer credit cards ‘with 55 days free of interest’ – do not be impulsive and lured into this debt trap.

The larger the amount you borrow, the more interest you will pay, the larger your monthly payments will be and for longer periods; and this will hinder you from saving money every month.

Know and pay what you can afford to pay
Understand your budget so that you can pay what you can afford every month within the limits of your current income. This helps you to ensure that you have money for paying your monthly expenses and to save. Do not spend money which you do not have – credit cards are a good example.

Choose a loan facility that offers affordable interest rates
Banks and most financial institutions are extremely competitive because they need your business. Therefore, many offer lower rates than competitors. Seize the opportunity to get the lowest interest rate if you are able to. Once again, ask yourself the question: Do I need the loan/additional debt?

Monitor your cashflow and spending
Keep track and prioritise how the borrowed money is spent. Do not splurge the borrowed money on unnecessary or unplanned purchases. Keep your credit records in good standing and always pay on time to avoid accumulating unnecessary interests and a bad credit rating.

Remember a reliance on borrowed money affects both the borrower and his/her family’s peace of mind and quality of life. Servicing a debt can be very stressful to all.

A lady creating healthy credit habits.
  1. Business Insider SA, 09 July 2020. These SA businesses have not survived lockdown - including popular restaurants and stores (online) [Accessed on 4 May 2021]
  2. Business Reporter, 5 May 2021. Nedbank holds exhibition to highlight danger of overspending (online) [Accessed on 6 May 2021]
  3. Experian Q4, 2020. Business Index Debt Quarterly Q4 2020 (online) [Accessed on 9 May 2021]
  4., 2021. How Can Savings Help You Stick to Your Plan to Pay Off Debt? (online) [Accessed on 9 May 2021]
  5. Roux, L.K., 12 April 2021. 'Having a car loan works against you when applying for a home loan' (online) [Accessed on 9 May 2021]
  6. Staff Writer, 3 May 2021. South Africa’s middle class is running out of money – here’s how many will struggle to survive a financial emergency (online) [Accessed on 4 May 2021]

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