The abuse of credit is one of the key reasons why millions of South African households are in financial difficulty. A recent financial wellness study showed that nearly 60% of 3 000 South African households sampled were shown to be in bad debt.
Marc Sternberg, Managing Director of Spark ATM Systems, South Africa’s premier independent ATM deployer, says the ease with which South African households can access credit in the form of personal loans and credit cards is resulting in many people spending way beyond their means.
The survey, which was a collaboration between the University of South Africa and Momentum and based on interviews with 2 937 respondents, found that 4.8% of South African households are in dire debt from which they cannot escape and 48.5% are in debt but still have a chance to recover.
“This access to credit is being fuelled by both retailers and banks, which, despite high debt levels amongst consumers, are increasingly eager to grant credit facilities through credit cards and personal loans.”
Standard & Poors recently warned that the rapid growth in unsecured lending is starting to create a credit bubble following a 35% year on year increase in unsecured lending to households for February 2012.
Sternberg says consumers who rely on credit often do not take into account the interest they are charged should they be unable to make their payments within the required time period. “These interest rates can be as much as 20% per month and only further deepen the financial strain on already overly indebted consumers.”
Sternberg adds that paying for purchases on credit can sometimes result in consumers spending more money than they intended. “With credit cards in particular it is extremely easy to get carried away, especially as people don’t check their credit balances every day. It is only at the end of the month that they realise they have overspent and cannot afford to service this debt.”
In contrast, he says that by using cash or a debit card and spending only the money that you actually have in the bank – even though it can be extremely difficult and requires proper budgeting and planning skills – will ensure that you stay out of the dreaded financial debt trap.