Credit cards and store cards have their conveniences. They enable you to buy items upfront that you can pay for all in one go at the end of the month. If this is how you are using such cards, a pat on the back for your financial discipline.
The trouble sets in when you don’t pay the full amount owing at the end of each month and perhaps pay only the required minimum. This is what the purveyors of such cards bank on, if you’ll excuse the pun. The less disciplined you are in using these cards, the more money they make in the form of exorbitant interest and other charges.
If you are paying the minimum on your card – say, R700 – but are spending, say, R5 000 on it each month, there is nowhere to go but down. And once you are caught in such a spiral – like snorting cocaine, it can take just one lapse of judgement to become ensnared – it demands a huge effort to free yourself. It’s like weaning yourself off an addictive drug.
You may have read my column a few weeks ago about the wonder of compound interest. Well, it works in reverse when it comes to debt. If you are not at least paying off the interest on a debt (which could be in the region of 20%), the amount you owe will increase exponentially.
There should be a law against people being able to buy consumables such as groceries on credit, because this is the worst possible debt, and the massive mountain of this debt is keeping millions of South Africans awake at night and preventing them from achieving financial freedom and improving their lives.
Ignore the rosy, smiley-family advertisements that punt the message that taking on credit will improve your lifestyle. They are grossly misleading and should be banned. The only way to a better lifestyle is a higher income.
Not all debt is bad (but most of it is). Bad debt is what I have just described; it’s when money is borrowed to pay for things that are consumed or that depreciate in value, such as cornflakes and cars. Good debt is money borrowed to buy an asset that appreciates in value, such as property (although even here appreciation is not guaranteed). A student loan is considered good debt, because you are investing in yourself and you will reap the benefits in your future earnings. And if you’re an entrepreneur who needs to borrow to fund your venture, that’s another example of good debt.
Grocery retailers Woolworths and, more recently, Pick n Pay have their own store cards. Both companies will argue that the cards provide convenience – even savings – for their customers, and they are granting credit only to those who can afford it and who will use the cards responsibly. I have no doubt that they are complying with the increasingly stringent legislation governing lending practices.
But the message they’re putting out to the wider public, advertently or inadvertently, is this: it’s okay to buy your consumables on credit and, if push comes to shove, to pay them off month by month.
Pick n Pay recently announced it had approved over R1 billion in credit to some 56 000 account holders. The actual take-up of this credit is far lower, but the fact is that the money is available to account holders if they are tempted to spend beyond their means or if they run into financial difficulties.
Neil Roets, the chief executive of debt counselling firm Debt Rescue, says: “When Pick n Pay opened store accounts for consumers, we made the point that food was the one commodity that consumers should try to pay cash for.”
Roets says that more than half of all South Africans are three months or more behind in their repayments, having collectively notched up some R1.73 trillion in debt, according to the National Credit Regulator.
The Pick n Pay credit facility, run in conjunction with the group’s Smart Shopper rewards card, allows you to buy on credit for between R1 000 and R40 000, depending on how much you qualify for.
Like other credit cards, you have an interest-free period in which to pay the full amount owing – in the case of Pick n Pay, it is 55 days. If you don’t pay in full, your custom interest rate, based on your credit assessment, kicks in. (The current maximum allowed by the National Credit Act regulations is 20.5%.)
Interest is charged on overdue amounts at the same rate as the interest rate applicable. If your account goes into arrears, Roets says, the credit provider can also do the following:
- You will be charged default administration costs, and costs and fees relating to debt collection;
- Default information will be submitted to the credit bureaus, which may affect your ability to obtain further credit;
- The company may suspend your credit facility and give you 10 days’ notice before closing your account, in which event you must immediately pay your account in full; and
- Your account may be handed over to debt collection agencies for the recovery of arrear amounts, for which costs you will be responsible. If the credit provider has to institute legal action against you in court, you will be liable for all the costs incurred, including but not limited to legal costs, as well as collection charges, tracing fees and taxes.
Whatever card you are using, my humble suggestion is this: pay cash for your cornflakes – in other words, don’t be tempted to pay less than the full amount owing.