Transunion's Consumer Credit Index (CCI) for the second quarter of this year shows that, although South Africans’ creditworthiness has improved slightly, the number of delinquent vehicle and home loans has increased.
There is a difference between loan delinquency and a loan default. According to Investopedia: “Loan delinquency is commonly used to describe a situation in which a loan borrower is late on a payment. A loan goes into default when a borrower fails to repay his loan as scheduled in the terms of the agreed promissory note he signed when he received the loan. Defaulting on a loan could adversely affect the borrower’s credit rating, making it difficult for him to borrow money in the future.”
The CCI climbed to 53.8 points in the second quarter from 50.8 in the first quarter and 49.2 a year earlier.
A score of 50 is considered the break-even point, with a lower score reflecting worsening credit health, which is characterised by an increase in new accounts in default (three months in arrears), as well as distressed borrowing (increasing use of store cards and credit cards).
TransUnion says only 0.5% of all credit-active consumers access their TransUnion credit report annually, and this results in consumers not proactively managing their debt and not being aware of the status of their debt.
Lee Naik, the chief executive of TransUnion South Africa, says although inflationary pressure has eased, it is difficult for consumers to recover from defaulting on repayments for large loans, such as home loans and vehicle loans, and it may take longer for an improvement on these loans to come through.
“Our advice to consumers is if you have experienced unexpected expenses and are struggling to meet your debt-repayment obligations, speak to your lending institution and ask for a payment holiday or to restructure your debt,” Naik said.
The CCI takes into account rates of early defaults, defined as loans that are three months in arrears, drawing from about 50 million accounts held by some 22m individual borrowers.
It also looks at distressed borrowing on revolving credit (store cards and credit cards), measuring R145 billion of revolving consumer credit to gauge the degree of household financial stress.
Priya Naicker, the advice manager at Old Mutual Personal Finance, says consumers become caught in a credit cycle when they use credit to finance everyday expenses. This results in them spending a large portion of their disposable income on servicing debt, and they end up paying much more for goods and services because of high interest rates on credit. If you use credit to pay off other credit, the cycle continues.
Naicker says a debt cycle refers to ongoing borrowing that is likely to lead to unaffordable credit payments over the long term.
Debt can be used to see you through a tough patch or to enable you to afford a large, once-off expense, such as a car or home, by spreading out the payments.
Bad consumer debt is showing signs of improving, figures from Statistics SA released earlier this month show.
StatsSA says the number of civil summonses issued in June decreased more than 16%, to about 48 000 cases, while judgments for bad debt fell 10.5%, compared with a year earlier. However, the value of debt in civil judgments rose 1.6% to R350m.
It is estimated that, by the end of last year, more than 40% of credit-active consumers’ had impaired credit records.
When you accumulate an unmanageable amount of debt – particularly short-term, high-interest debt – you are at risk of being trapped in a debt cycle. Old Mutual says you can prevent this by:
• Not taking on expensive short-term debt, which typically includes credit and store cards. If you do run up short-term debts, pay off the most expensive debts first.
• Build up savings to cover a financial emergency. This will provide you with an alternative to borrowing.
• Create a robust budget. This will help you to plan and allocate your spending so that you can pay off expensive debt while contributing to an emergency fund.
• Create excitement around your goals and put a plan in place to achieve them. This will help you to resist the temptation to create debt that could compromise your goals.