CREDIT where its due: Penny Hawkins of Feasibility, talking at the over-indebtedness summit in Midrand, says most South Africans had shop credit.

The interest rate cut earlier this year hasn’t done much to reduce the over-indebtedness of South Africans, thanks to sharp rises in the cost of electricity, fuel and food – and the fact that, generally, the over-indebted didn’t use the saving to reduce their debt burden.

This emerged at an over-indebtedness summit hosted by the National Debt Mediation Association and the credit ombud in Midrand last week.

Professor Bernadine de Clerq of Unisa’s Personal Finance Research Unit said her team’s second-quarter research revealed that South Africans were back to the indebtedness levels of the 2009 recession.

“And the situation has worsened dramatically in the last quarter,” she said.

“Many have since gone from what we term mildly exposed to very exposed.”

National Credit Regulator (NCR) figures released this month back that up – the number of consumers regarded as being in good standing fell by 60 000 to 10.38 million.

Put another way, almost half the country’s 19.6 million credit-active consumers were not in good standing at the end of June. That means they had either missed more than a couple of instalments, had a judgment against them, or had been handed over to debt collectors. And that figure has no doubt worsened since June.

Plus, that’s not the whole story – the NCR data only focuses on credit agreements. Debts not reflected in those numbers are municipal, medical, clothing and cellphone debts and tuition fees.

“It’s not income vulnerability which causes the problem,” De Clerq said, “it starts with expenditure… people can’t afford things now because they overspent on their car or their house, and now they can’t meet their repayments.”

In other words, they’re living beyond their means; failing to fund a lifestyle they simply can’t afford.

On the other hand, taking the entire population into account, most South Africans don’t have access to formal credit and borrow from moneylenders or family to meet basic needs. This is according to Dr Sabine Strassburg of the Finmark Trust, which surveyed almost 4 000 South Africans earlier this year.

Their top reason for borrowing money was to buy food.

Dr Penny Hawkins, of the economic policy and research company Feasibility, said the poor were forced to pay by far the highest interest rates, too.

Looking at the forms of credit in the marketplace, Hawkins said the number of home loans had dropped since 2002, but the “big winner” was the huge surge in the number of credit and store cards in the 10 years, across the board.

“It’s very unusual to find a South African who does not have store credit,” she said.

I found Hawkins’s presentation revealing in two respects:

She said instalment sales – think furniture – had been fairly static in recent years. “They are making their money from add-ons,” she said.

Add-ons such as extended warranties, club memberships and credit life insurance. Credit life insurance, being “paired” with the loan, made consumers “captive”, she said.

These policies cover the goods in the period the consumer is paying them off, and the credit provider has a legal right to force their customers to pay for such insurance.

“Consumers are not forced to take the credit provider’s insurance when they sign an instalment deal; they can cover the goods under their own insurance policy. But in reality, unless they have the policy with them, they will take the credit provider’s… insurance.”

It was not known what percentage of those who acquired this insurance actually made claims, she said. However it is suspected to be low, making credit life insurance hugely profitable for the providers.

A solution would be for consumers to take out their own short-term insurance policies, and add items to it as they acquired them.