The latest Consumer Credit Market Report, which revealed that the total value of new credit granted to consumers showed a year-on-year increase of 22.91% and a quarter-on-quarter increase of 10.04% from R95.03 billion to R104.57 billion, confirms this statement. Garner says that the increase of credit facilities by 12.95% quarter on quarter from R15.29 billion to R17.27 billion highlights consumer's need for credit.
Garner says that the recent Consumer Financial Vulnerability Index (CFVI), which focuses on the cash flow of consumers to determine their ability to cope financially, also draws attention to how consumers are struggling financially. "The index revealed that during the second quarter of 2012 financial vulnerability rose significantly amongst South Africans.
"The index is measured from 0 to 100, with a lower score indicating more vulnerability, while a higher score indicates more security. With the index dropping to 48.6 points, down 10.3 points from the first quarter, it highlights how consumers are feeling increasingly exposed financially."
Garner says constant rising costs, such as petrol, food and electricity prices, means consumers are feeling more of a pinch when it comes to allocating their income. "Not only is the cost of living increasing, but this, coupled with additional monthly expenses, such as medical aid, rent or mortgage repayments and school fees means that more consumers are turning to credit to fund their lifestyles and in turn are finding themselves in serious debt."
He says the financial vulnerability felt by consumers has resulted in many seeking to take on more debt in order to service their existing debt. "Consumers are increasingly outspending their means each month which results in many depending on debt to service their monthly expenses.
"With unsecured loans and credit card overdrafts readily available to consumers, it opens up a dangerous path for consumers to overspend and this can lead to serious consequences."
Recent statistics released by the Reserve Bank has highlighted how a vast number of consumers have to use the majority of their disposable income to service their debt. Figures revealed the continued high rate of unsecured lending has contributed to rising household debt, with the ratio of household debt to disposable income increasing from 75.6% to 76.3% between the first and second quarters of 2012.
Garner says that unless consumers improve their ability to spend within their means and save accordingly they will continue to battle financially. "In order to do this, it is vital that consumers budget effectively, control their spending habits and monitor their personal consumer price index. This means when prices are increasingly disproportionate to income, leaving consumers with a shortfall each month, the default position should not be to replace this shortfall by using credit cards, overdrafts or any other form of debt. Instead, consumers should be adjusting their spending habits to reduce their expenses."
• Stop the habit:
The biggest problem most consumers have when it comes to overspending and debt is that they continuously perpetuate the problem by repeating this habit. It is vital to take action and stop this habit. The best way to do so is by creating a monthly budget, thus ensuring that it is known what money is being spent on.
If consumers find that they are still overspending relative to income, adjustments need to be made. This should be done by reducing the luxury items that are not absolutely necessary, such as dinners at restaurants, and excessive clothing purchases.
• Plug the gaps:
Once a budget has been put in place and the habit of overspending has stopped, short term debt expenses, such as credit cards, overdrafts and unsecured loans, should be settled.
By simply not adding to the debt on a monthly basis, progress has already been made in reducing the debt. However, in order to put a significant dent in debt owed, consumers should look contributing additional funds to this short term debt.
• Break the debt cycle:
In order to get financially fit and non-reliant on debt, consumers need to break the debt cycle.
Once all short term debt has been settled, including cars and other longer term instalment debts, it is import to start saving towards next purchases rather than simply replacing the old debt with new debt and a new vehicle. Consumers should rather save for an additional year or two to accumulate a big deposit or pay for the item in full.
