South Africa’s middle-income consumers on average spend 25% of their take home monthly income to pay interest accumulated on debt.
This is according to FNB’s analysis of money management behaviour of its Retail banking customers who earn between R7 000 and R60 000 per month. The Bank defines money management as one’s ability to adequately allocate income to meet short-term, medium-term and long-term financial commitments and goals. FNB says its data paints a picture of households that are heavily reliant on unsecured debt to get through each month.
Raj Makanjee, FNB Retail Chief Executive says, “consumers who have not defaulted on a credit repayment in the last 18 months show better money management practices in general. These consumers are typically saving more compared to those who are in arrears and hold more secured credit, such as a home loan or vehicle finance as opposed to unsecured credit.”
Christoph Nieuwoudt, FNB Consumer Chief Executive adds that, “in contrast, the reliance on debt is higher among consumers who have defaulted on three or more credit obligations in the last 18 months, with nearly 80% of monthly interest paid going towards servicing unsecured credit. Consumers are also taking on expensive forms of credit, from multiple providers and potentially at maximum interest rates.”
FNB shares the following insights to give consumers important guidance on managing credit:
- Pay off your debt: There is no getting away from this step, to get out of the debt cycle, you must cut back and get rid of unnecessary credit. There are a couple of ways to approach this; the first option is to pay-off smaller debts/loans first. Once these are paid off, you can redirect these payments towards bigger credit obligations. Alternatively, you can prioritise paying-off debt with the highest interest rate first. This will also help to save on interest over the long-term.
- Consider debt consolidation: This enables you to consolidate your qualifying debt from various credit providers into one convenient and affordable long-term repayment. A typical example would be a solution such as FNB’s Credit Switch, where you only pay one interest rate, one installment and one set of fees. This can potentially free-up some cash flow to enable you to save.
- Manage your credit record: When credit providers assess your credit worthiness, they look at your overall behaviour of how you manage credit. Whether you have missed a payment on a store card, furniture retailer account or a registered micro-lender – it is all recorded on your credit profile. A money management solution such as nav>>Money, can be handy in this regard because it is personalised to help you track your spend, available funds and credit status on your FNB profile.
- Avoid taking on unnecessary new debt: Taking on new debt once you have excess cash flow can be tempting but it’s important to resist falling back into a debt trap. This is your opportunity to prioritise building a savings kitty for emergencies or saving up for a deposit to invest in an asset like property, which can generate long-term value.
- Use credit to improve your future prospects: While we highlight concerns with using credit for consumption expenditure, sensible use of credit can create significant value. An analysis of our customers’ earnings shows that education is a major driver among customers who seek unsecured credit and this generally adds significant value to long-term earnings prospects. Transportation is another key factor, therefore using vehicle finance to buy a car for personal or business is significantly less expensive than using an unsecured loan for this purpose. Lastly, property is the largest driver of savings for a proportion of households, hence using a mortgage to purchase property saves you from paying escalating rentals, instead your instalments remain fixed while the value of your investment will grow over time.
“Access to credit remains a vital asset for a consumer and has been a gateway to financial inclusion for most people. Unsecured credit can be an important buffer when household budgets are not sufficient to cover unforeseen expenses. However, we caution consumers to avoid being heavily reliant on unsecured credit for day-to-day consumption as this limits their ability to employ good money management practices such as saving for financial goals or investing for the long term,” concludes Makanjee.