Dear South African, Here Is Why You Should Be Worried About Buying On Credit

The debt bubble is starting to bulge, but are you worried about your level of personal debt? No. Well, perhaps you should be.
The debt bubble is starting to bulge, but are you worried about your level of personal debt? No. Well, perhaps you should be.

By Hannah Harvey

The debt bubble is starting to bulge, but are you worried about your level of personal debt? No. Well, perhaps you should be. – Hannah Harvey

Some experts believe that growing levels of personal debt are the greatest threat not just to the prosperity of South Africa, but also to the prosperity of the modern world. The debt bubble is starting to bulge. In the last two decades, the level of personal indebtedness has shot up to unprecedented levels. The real worry is that if the debt bubble bursts, things could really get ugly.

The size of the debt problem in South Africa

In South Africa, the size of the debt problem is considerable. The current level of household-debt-to-income in South Africa is 78 percent. That means that only R22 out of every R100 that South Africans earn each month is used to pay living expenses. That includes food, clothing, utility bills, school meals, entertainment, holidays etc. The remaining R78 is used to service ongoing debts.

That might sound like a pretty dangerous financial position to be in, but not when compared with the level of personal debt in some of the world’s strongest economies. According to household debt data from the OECD, the level of household-debt-to-income in the US and UK stands at 113 and 156 percent respectively. So, on the face of it, the personal finances of the average South African are actually in a comparatively strong position.

The growing problem of debt

The ease with which we can access credit, combined with society’s growing obsession with status and social climbing, has led many consumers to make rash personal finance decisions. Rather than saving money to buy the things they want, the growing tendency for instant gratification means many are more inclined to buy now, pay later.

Credit cards are being used to finance lifestyles that people simply can’t afford. The use of credit in this way has become an accepted part of life, breeding a sense of entitlement and excessive consumption. However, spending beyond your means and relying on credit in this way is a recipe for disaster.

The consequences of a lifestyle bought on credit

Every time we are tempted to purchase another non-essential item on credit, we are simply reducing the amount of money we can spend on living expenses during the month, or potentially save. With each item purchased, our ability to meet the cost of unexpected or emergency expenses, such as fixing a boiler or a car, diminishes. Eventually, if this behaviour carries on, an individual’s entire income can be swallowed up by payments to service these debts and simply surviving will be a big enough ask.

The importance of financial literacy 

Financial literacy is closely linked to the levels of indebtedness people find themselves in. A recent survey of 18,000 customers by Wonga SA found that 77 percent did not take into account the fees or interest charges on credit applications. There was also confusion about the purpose and importance of credit reports, with only 43 percent having a clear idea of what a credit report is.

No one likes being in debt, but most people believe that the use of credit is an essential part of modern life. It’s not. Until financial literacy levels catch up with the current reliance on debt to fund even non-essential purposes, there will continue to be serious problems.