Rising cost of living forces South Africans into credit card dependency
South Africans have faced a challenging year dealing with sluggish economic growth, limited consumer spending power, and unprecedented hikes in fuel prices that disrupted daily life, putting extra pressure on consumers and business finances.
This was according to Sebastien Alexanderson, the head of National Debt Advisors, who said that as the cost of living continued to rise and financial pressures mounted, many individuals and households have turned to credit cards to manage day-to-day expenses and deal with unexpected financial burdens.
A recent McKinsey Global Consumer Sentiment Survey revealed that 87% of consumers describe their current economic situation as stretched, leading 61% to cut back on spending.
This belt-tightening has led to 32% of shoppers substituting branded products with more affordable alternatives.
Moreover, the recent assessment of the broad money supply and credit extension in South Africa has revealed that several financial services providers have observed a significant rise in credit impairments such as late payments, defaults, bankruptcies, and other adverse financial events that negatively impact someone’s credit score and creditworthiness.
Woolworths Financial Services saw a 7.3% impairment rate in the year leading up to June 2023.
Meanwhile, Nedbank, a major South African bank, witnessed a 57% increase in credit impairments in the first half of 2023.
Standard Bank’s overall credit loss ratio shot up to 97 basis points, hitting the upper end of their typical range, which usually spans from 70 to 100 basis points.
Alexanderson said this growing dependence on credit cards highlights the need for individuals to realise the urgency of their financial situation and take proactive steps to regain control over their finances.
“The rise in credit card dependency is deeply concerning and mirrors the financial struggles that many South Africans are currently facing. It's crucial for individuals to recognise that there are steps they can take to regain control of their finances and break free from the cycle of debt,” said Alexanderson.
Alexanderson said breaking free from the relentless cycle of debt starts with seeking professional advice and exploring options like debt counselling, which can provide tailored solutions to help individuals manage and eventually overcome their debt challenges.
“Knowing when to ask for help is a crucial step towards achieving financial stability and peace of mind in these challenging times,” said Alexanderson.
Alexanderson offered the following tips for using credit cards wisely:
Shop Smart: Before applying for a credit card, do your homework.
Compare interest rates and fees, like annual fees and foreign transaction fees, as these must be disclosed by law. Remember that each credit card application results in a hard inquiry on your credit report, which can impact your credit score, so apply selectively.
Ensure Timely Payments: To avoid paying interest, pay your credit card bill in full and on time.
Most credit cards offer a grace period, typically a minimum of 21 days from the end of a billing cycle to the due date, during which you won't be charged interest if you pay in full by the due date. Sign up for an automatic pay method to ensure you never miss a payment.
Manage Credit Utilisation: Aim to use no more than 30% of your credit limit (some recommend staying below 10%) to maintain a good credit score. As your credit limit increases over time, pay attention to this rate and consider requesting a credit limit increase if you won't overspend.
Use Your Credit Card: Don't keep a zero balance on your credit card; lenders and issuers want to see responsible credit use. While keeping your credit utilisation below 30%, make purchases on your card to demonstrate responsible usage.
Meanwhile, Neil Roets, CEO of Debt Rescue, said that the financial landscape for consumers reached a critical juncture that is both alarming and heartbreaking.
“As economic pressures continue to mount, countless individuals and families are increasingly turning to credit just to secure their most basic needs—food and shelter. It’s disheartening to witness credit cards, which were once seen as tools of convenience, now serving as a desperate means for survival,” Roets told Business Report.
“Many families remain trapped in a cycle of debt, with rising prices outpacing any relief offered by these monetary adjustments. It is clear that for the majority of South Africans, the struggle to make ends meet has only intensified. The current surge in credit dependency reflects the dire situation we face. As families resort to credit to cover everyday expenses, they risk entering a perilous cycle of debt that can have long-lasting repercussions on their financial health and creditworthiness,” Roets said.
“I urge consumers to recognise the urgency of their financial situations and to take proactive steps to regain control. There are resources and professionals ready to assist those struggling with debt, and seeking help is not a sign of failure but a critical step towards financial recovery. By confronting these challenges head-on and exploring debt counselling if they are over-indebted, consumers can rebuild the financial stability that so many South Africans desperately need,” he further added.
BUSINESS REPORT