Getting personal debt under control

Consumers usually start every year with higher debt levels following a free-spending holiday season, with 2022 bringing more challenges than usual.

“We are facing higher inflation, rising electricity, petrol and food prices, and higher interest rates,” says Tonia Pavlou, deputy CFO at credit provider RCS.

It is telling that Pavlou warns about an over-indebted population, seeing that RCS is in the business of supplying credit to consumers, and in particular store cards to be used at the majority of retail chains in SA.

“The statistics are concerning, pointing to consumers having taken considerable strain during the first quarter of the year. Historically, overspending during the festive season has a domino effect on the first few months of the year.

“A recent report by market research consultancy Eighty20 found that members of the mass credit market in SA can be characterised as ‘stressed’ in relation to their level of indebtedness. The mass credit market accounts for the majority of credit active people, 82% of whom have retail credit and a fifth of whom have credit cards.

“Typically, this market has a monthly instalment to net income ratio of over 70% or at least two loans that are in default,” says Pavlou.

Credit data available at the end of December 2021 showed that the middle class is sliding further into debt, according to Eighty20 Consulting’s recent Credit Stress Report. “Vehicle asset finance and credit cards were most affected, with overdue debt increasing 35% and 20% respectively year on year.

“After dropping by nearly 30% over the past four years, the number of outstanding loans stabilised, with almost no increase in real loan accounts, although retail trade defied expectations in December with 3.1% growth from the previous year,” according to the report.

Eighty20 notes that the number of credit accounts at least nine months in arrears (which make up half of all loans in arrears) continues to grow, albeit at a slower pace.

It says the proportion of loans in good standing has remained stable over the past year at 62%, neglecting to point out that nearly 40% of all loans are in arrears.

That equates to a lot of people with financial problems.

Financially stressed

RCS would classify people who are obliged to pay more than 70% of their income towards debt as being over-indebted.

In reality, it means that somebody who earns R20 000 after tax will see R14 000 disappear towards servicing debt. It is gone – only R6 000 left – before getting within 15 metres of an ATM after working a whole month.

Pavlou says that somebody who needs to pay 65% of their income towards servicing debt and is up to date with all their instalments and repayments would not be considered to be over-indebted.

It still looks like an uncomfortable position, raising the question of how much debt any individual should have.

“There isn’t a definite answer. Everybody is unique and everybody has different circumstances,” says Pavlou.

She says people have a “fear” of financial affairs, simply saying that they are not financially inclined. During an interview with Moneyweb, she noted several times that people should have a good “relationship” with their finances.

“The quieter winter season is the ideal time to reflect on finances, and, if necessary, work on your relationship with your debt,” she adds.

There are small but significant steps that can be taken towards improving your financial position.

New debt

When considering new debt, people should be conscious about what they are taking on, understand the need for it, and understand the repayment obligations. New debt should be considered while taking into consideration other commitments and income.

Take action if you are over-indebted or feel stressed about your financial situation, says Pavlou.

“The journey to becoming less indebted and financially secure begins with good planning, followed by consistency.

“If you are struggling to decrease the amount of debt you’ve accumulated over the summer months or you are concerned with rising prices and rising interest rates, you can focus on making a concerted effort to work closely with your debt cycle.

“You can do this by avoiding the things that trigger excessive spending. For some people, this may mean temporarily unsubscribing from those promotional offers that your favourite retailers send out regularly.

“For others, it could mean putting a stop to visiting shopping malls.

“Cutting out temptation and opportunities to overspend while you are working on reducing your debt can go a long way towards reaching a longer-term goal of financial fitness,” she says.

Pavlou also notes that the reality of being over-indebted can be emotionally distressing and can have broader consequences in other areas of your life.

Written plan

The first step is creating a debt repayment schedule, using a basic Excel spreadsheet or writing a list of exactly how much is owed to whom. This information is readily available.

“Seeing the figures on paper will give you a full view of your finances and help you to plan your debt repayments strategically,” says Pavlou.

“Decide which debt to pay off first to improve your cash flow.

“Track your progress. Seeing debt reduce helps [you] to feel less overwhelmed and keeps you motivated to remain consistent with your repayments,” says Pavlou, warning that it might be long process.

“Receiving an unexpected windfall such as income from a side hustle, a tax refund, a gift or a bonus will always be a welcome surprise. The unfortunate reality is that any extra income means extra spending.

“Challenge this mentality.

“Invest in your future self by paying down today’s debt. The opportunity to spoil yourself is still there, you are just choosing not to exercise it immediately, but rather at a future date.

“If you can manage your debt, you will accelerate your journey towards becoming more financially secure.

“Reward yourself at specific milestones to make your financial journey a positive experience, with a long-term view,” she says.

Her plan is simple:

• Make a list of all your debt and monthly payments
• Decide which accounts to pay off first
• Check progress regularly
• Beware of temptations
• Set new financial goals

Pavlou says people must also educate themselves on using debt responsibly, and educate themselves on issues pertaining to their personal finances in general. “Embrace your personal finances. Don’t let debt keep you awake,” she says.

 

As an aside, the opportunity to quiz the account manager from the public relations firm who set up my meeting with RCS was too good to miss.

A bit surprised, he nevertheless shared his situation. “At this stage, I have very little debt. I just started my career. I only have a car loan at the moment.

“I am lucky that a lot of information about personal finances cross[es] my desk. I am learning a lot and have a financial plan in place,” he says, also noting that he wants to maintain a good credit score.

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