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A practical guide to not drowning in junk

By Lee Naik, CEO at TransUnion

Junk status.

With just two words, South Africa has been sent into a state of chaos and uncertainty. With just two words, Standard and Poor’s has thrown away all of the country’s hopes for the future. Or has it?

There’s a lot of panic in the air, but isn’t it time to take a deep breath and consider not just the implications, but what we can do about it?

First, the impact on consumer spending and household debt. In TransUnion’s previous CCI report, we mentioned that although South Africa’s credit health was stable, a trigger could send it on a downturn. It’s safe to say that that trigger has arrived.

Economist Dawie Roodt is optimistic, saying the country could recover in a couple of years, depending on leadership and policy. Professor Jannie Roussouw, Head of Economics and Business Sciences at Wits University, believes we could be out of it in three to five years. Momentum’s Sanisha Packirisamy suggests that the best case scenario would see a reversal in the next five years. Some more pessimistic estimates place the recovery time at 10 to 12 years, similar to Colombia’s path.

Predictions might differ, but we should wrap our minds around being at junk status for the foreseeable future, and there’s not much that we as consumers and businesses can do about it. It’s a disconcerting thought, but I cannot help be reminded of the Serenity Prayer: ‘God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.’

Whatever your belief system (or sobriety level, as this prayer has been adopted by the AA), the message is an important one for South Africans right now. We know that inflation’s going to go up and that we can’t do anything about that, but there are things we can do instead of crying that the sky is falling.

I’ve spoken before about what businesses can do to stay relevant when consumers are spending less, and frankly, that advice is sounder than ever. For the rest of us, we’re going to have to make smart choices in a world in which our credit card spending habits have the potential to derail our long-term savings and financial wellbeing.

What do those smart choices look like? Ahead of TransUnion’s upcoming credit health report, I’ve consolidated some of the best advice for South Africans looking to stay afloat in a sea of junk.

Maximise your spending 

Because of South Africa’s higher investment risk profile, the rand is likely to depreciate and the cost of imported goods will probably go up. Unfortunately, this will have an impact on the cost of living, since we have had to import more food due to the drought. For consumers, the trick will be to manage disposable income more effectively with these increases in mind by doing things like buying in bulk and taking advantage of platforms like BrandMatch, coupon apps and customer loyalty programmes.

Avoid the debt trap 

It’s meat and potatoes advice, but it never goes out of style: remember to keep saving month-on-month, and have a solid expenditure plan in place. Know exactly what your income is relative to costs and debt obligations to avoid falling into the dreaded debt trap – where your salary cannot keep up with increased borrowing and expenses being taken on.

Pay the smart way

We know we can expect interest rate hikes on the repo rate, and this will filter down to consumers residing on flexible prime rate linked credit facilities. The debt service costs for consumers will rise as a result. Consumers should therefore strive to pay off high-interest rate credit facilities first, to minimise the additional debt costs that will be passed onto them by the repo rate hiking cycle. It’s also smart to shop around for the best interest rate when taking out any kind of new credit obligation.

Keep an eye on your score 

For financial institutions, the cost of attaining funding will increase, a cost that is normally passed onto borrowers or consumers in the form of higher interest rates. However, South Africa currently has fairly stringent lending guidelines on maximum interest rates, which means banks will simply not be able to offer credit to consumers past a certain risk threshold. It’s more important than ever to keep up-to-date with your credit profile and be vigilant of any warning signs that might lead to a negative credit assessment by lenders.

Avoid the sharks and go easy on the credit 

With disposable income inevitably drying up, it’s going to be tempting for people to ease the pressure on their wallets through short-term lending – payday loans and credit cards, for example. Unfortunately, these will be most impacted by the repo rates as they tend to have high interest rates. While your credit card can be a life-saving source of help in difficult times, it’s critical to not take on too much debt. You should also be mindful of venturing into non-traditional, informal credit arrangements with debilitating repayment costs.

Consolidate your debt 

There’s one very clever way in which consumers can avoid defaulting on their higher cost finance arrangements: by consolidating existing debt into their home loans. It’s often easier to pay off one big debt at a low interest rate than many smaller, high interest debts. To do this, you’ll need to have positive equity on your bond – in other words, the value of the property must exceed the current outstanding loan amount. Using this excess, you can then pay off credit cards, store cards and vehicle finance arrangements with higher repayment rates. However, abusing this strategy will lead to higher repayment costs in the long term, so you’ll need to maintain financial discipline to avoid racking up the short-term debts again.

Junk status isn’t going to do us any favours, but getting caught up in doom and gloom isn’t the solution. In the coming weeks, ask yourself what you’re doing to build and maintain great credit health and sensible household spending habits to weather the storm, however long it may be.

TransUnion is a proud Partner of the NSBC.