Debt amounts to 73% of household income, according to the South African Reserve Bank, while a report by the TransUnion SA Consumer Credit Index found that accounts in early default sat at around 816 000. While these figures are subject to quarterly fluctuation, the overall message is clear: South Africans are spending too much of their income on paying off debt.
“It is possible to maintain a good credit record, save a portion of your monthly income, and at the same time, maintain a healthy balance sheet,” says Vera Nagtegaal, the executive head of Hippo.co.za. The trick is to budget and be judicious about the items you buy on credit, she explains.
Nagtegaal points out that up to 10 million South Africans are reportedly severely in arrears on their debt and struggling to repay what they owe. But, on the upside, there are ways to avoid the debt trap and make sure you have enough money in the bank when you need it.
Maintaining a good credit score
Nagtegaal says your credit score is a valuable financial asset, which will enable you to enter into a cell phone contract, open a store account, get a bond or obtain finance to buy a car.
Thanks to the National Credit Act, every South African is entitled to access a free copy of their credit record through credit bureaus such as Experian, TransUnion, Compuscan and XDS.
“It’s a record of how well you conduct your financial affairs – whether you pay back credit on time or default on payments. It allows future credit providers to make informed decisions when considering new applications,” she explains.
“Judgments against your name also reflect on your credit record, disqualifying you from the benefit of buying on credit for a number of years.”
Nagtegaal suggests conducting an annual check of notations or judgments against your name, so that you can begin the process of making amends if you’ve found yourself in trouble with a specific company.
With good credit comes great responsibility
Maintaining a good credit score goes hand in glove with being a responsible borrower.
Nagtegaal distinguishes between what is commonly referred to as ‘good’ and ‘bad’ debt. Taking out a loan to buy a car or a home, for example, constitutes positive credit purchases. Bad debt is either money borrowed that can’t be repaid or it’s regarded as debt that’s used to purchase things that bring little or no long-term value.
“It’s a good idea to make sure you are paying the lowest interest rate on your debt – for example, your bank might lend you the same amount of money at a much better interest rate than a retail store, so always shop around if you need to buy on credit.”
Avoid buying everyday clothing or food items on credit, as these purchases should come out of your monthly expenses budget, she suggests.
“Buying groceries on credit quickly becomes a vicious cycle of debt – you pay it back at the end of the month, only to find that you need to borrow again to get through the next month.”
The key, she says, is careful budgeting and making provisions for a safety net in the form of a savings or an emergency fund. General savings are for short- to medium-term goals, like a holiday, new furniture or a deposit on a car or house. An emergency fund should ideally amount to between three and six months’ worth of your salary, to cover a crisis.
“Being disciplined about saving will spare you long-term credit pain.”
It’s important to choose the right savings vehicle to suit your needs, which is why Hippo.co.za has incorporated a Savings Account Comparison tool, allowing users to compare options and interest rates, Nagtegaal concludes.