Analysis: Consumer debt behaviour

By Danielle van Wyk

With the price of everything from milk to electricity increasing recently, it is no surprise that consumers are feeling the pinch. We take a look at the recent reports in consumer financial behaviour, as conducted by the TransUnion Consumer Credit Index.

What is the Consumer Credit Index?

“The TransUnion SA Consumer Credit index is an indicator of consumer credit health compiled by TransUnion, a global leader in risk and information solutions with technical support from ETM Analytics, and released quarterly. It measures the aggregate consumer loan repayment record, tracks the use of revolving consumer credit facilities as an indicator of distressed borrowing, estimates household cash flow as a means of determining financial pressure/relief, and quantifies the relative cost of servicing outstanding debt.

“These aspects are then combined into a single indicator of credit health. The indicator combines actual consumer borrowing and repayment behaviour with key macroeconomic variables impacting on household finances. The methodological approach is to capture aggregate data about real world action rather than collate survey responses about consumer perceptions or expectations,” explained TransUnion.

Consumer behaviour

 “The report suggests that a greater percentage of consumers are now starting to feel more pressure on their cash flows and are battling to meet all their commitments,” stated Owen Sorour, senior vice president, analytic and decisioning solutions.

Sorour further suggested that the continued inflationary pressures and possible interest rate hikes have exacerbated the situation.

“The CCI fell to its lowest level in three years, reflecting the adverse impact of rising interest rates and higher consumer price inflation feeding into worse loan repayment behaviour. New accounts in default (three months in arrears) climbed 1.8% y/y, compared to a drop of 5.3% in the fourth quarter. Distressed borrowing increased marginally by 0.7% y/y, compared with 0.1% the previous quarter. Overall credit behaviour worsened although the rate of deterioration was not particularly alarming. That said, the trend appears to be negative.

“Household cash flow tightened further in the 1st quarter, on the back of rising nondiscretionary price inflation, a product primarily of sharp currency weakness. Household debt service costs accelerated sharply in the first quarter as the South African Reserve Bank raised the repo rate by a hefty 75 basis points during the quarter,” reported TransUnion.

Biggest emerging trends

The report noted that customers are “definitely spending less on non-essential items and spend on furniture and motor vehicles have dropped significantly. We have also seen an increase in exposure on credit cards while spend on Store cards has dropped. This could indicate that consumers are using credit cards to purchase food and basic items as opposed to clothes,” added Sorour.

Tips for consumers – debt management

Managing your monthly cash flow starts with the consumer and irrespective of what they are offered, they should ensure that they are able to afford the monthly instalments.

In addition, the new affordability regulations will also do its bit to help prevent over indebtedness to a degree and will prevent unscrupulous lenders from exploiting the consumer. 

Total household income and expenses are however not available in most instances and it is thus difficult for a credit provider to understand all the commitments a consumer may or may not have, noted Sorour.

“While the credit provider has a role to play, it is the consumer that understands his expenses best and they should always ensure they can afford repayments on debt they apply for. It is also imperative to leave a buffer in your cash flow for unexpected expenses or future rate increases.

“Should you find yourself in financial difficulty, firstly assess where you spending your money each month and cut back on those non-essential items (there are usually a number of nice to haves). Should you then still not be able to make ends meet, approach your respective credit providers to restructure your debt/reduced payments before matters are completely out of hand.  Applying for debt counselling should be done as a last resort as you will not qualify for any further loans while in debt dounselling and it is more expensive to the consumer,” added Sorour.

The outlook for the macroeconomic environment will remain a challenge in the short to medium term. In light of this consumers should be conservative in increasing their debt exposure at this point in time.

 Handy tip: If you are struggling with debt, apply for debt counselling.

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