Be warned: Too much debt makes no cents

It provides many a modicum of financial freedom – especially when it comes to big purchases such as a house or a car – but too much credit can be a bad thing, particularly for the youth.

Financial information services company Experian said the youth, classified as those under the age of 35 who comprise students, graduates and young professionals, were misguided in their beliefs about credit.

According to Keith Wardell, commercial strategy director at Experian South Africa, credit usage was unfamiliar territory for some, with many young people falling for the misguided belief that the more credit they took on, the better their credit profile.

Wardell said they believed more credit would make it easier to apply for loans and make major purchases, which was not necessarily true.

Instead he said more credit led to many taking on more debt as either their disposable income or financial support from parents shrank. This debt was accumulated by day-to-day or monthly purchases or expenses such as food, transport, rent, car repayments and student loans.

According to Statistics South Africa’s latest national and provincial labour market youth report released in 2015, a total of 19707 young people between the ages of 15 to 35 are employed.

Of those, according to a story which appeared in Independent Online earlier this month, most are drowning in debt. The story is based on the results of a youth survey conducted by the Credit Ombud office on 250 Gauteng-based young people between the ages of 18 to 30.

The survey results revealed that many had opened accounts from the age of 18, which were mainly clothing accounts, personal loans and credit cards.

The respondents said the credit was used to fund their lifestyles which include a large interest in branded clothing, cellphones, tablets, fitness watches, HD TV sets, music systems, expensive cars, apartments in upmarket areas and regular takeaways.

“This is a scary reality for our young people. My bigger concern is their view on debt and spending patterns, which suggests that they are really not good at managing their credit,” Credit Ombud Nicky Lala Mohan was quoted as saying.

Wardell, however, warned that building sound creditworthiness was vital in order to ensure South African youth had a good standing for the future and addressed immediate challenges posed by the tougher economy where it was becoming increasingly difficult to make ends meet. “We encourage the youth to attain financial independence by spending responsibly, while managing any accumulated debt well,” he said.

“Young adults need to become more aware of their credit rights in order to make credit work for them.

“Credit is necessary for establishing one’s own creditworthiness but only if the individual has assessed their ability to do so, are realistic about taking on debt and can afford to do so responsibly.

“There is a common misconception that the more credit accounts one holds, the better their credit rating. This is quite the opposite if mismanaged.

“Debt should only be taken on if you are in a position to service this well and make repayments on time. It should never be taken on with the purpose of improving your credit rating as this could do more harm than good.”

In order to build a good credit record, Wardell advised the youth to pay bills on time, review their credit report regularly and know their credit score.

“Paying debt late not only accrues interest on bills and increases your repayments, but can also be detrimental for your credit profile.

“This may put you in bad standing when needing to make big purchases on credit in the future.

“If you are unable to pay a bill on time, rather contact the bank or clothing store directly and make alternative payment arrangements.

“Leaving this indicates a stronger likelihood that you will make late payments again or be unable to repay debt in the future,” he said, adding that it was always a good idea to pull your credit report regularly to check for any errors.

“And to ensure your financial health is in good shape. This is especially important before making big purchases as it gives you a view on whether you are in a good position to commit to payments.

“Keeping watch over your credit score is equally important for building your credit reputation.

“Credit scores are calculated on the basis of payment history, current levels of debt, type of credit accounts used, length of credit history and the number of credit enquiries.”

In a story which appeared in the Daily Dispatch last year, a TransUnion survey conducted in August saw 1000 consumers over the age of 18 admitting that they were confused on how credit scores and credit reports worked.

Survey results showed that more than 72% of participants agreed that their credit score was important to them but only 45% understood how credit reports were generated.

Many consumers were confused about how credit scores and credit reports generally work, with only 36% of respondents knowing the difference between the two.

The survey further revealed that 33% of consumers had never checked their report, while 41% said they had checked in the past year.

Only 8% had checked their reports in the past 30 days.

A senior director at TransUnion, Garnet Jensen, explained that a report was a record of how consumers managed their credit.

Creditors send information about your credit history with them to one or more of these credit bureaus.

When you pay on time, miss loan payments, pay late, default on a loan or have a debt dropped, this information goes on your credit report. Once collected, the data is then distilled and calculated to a create a three-digit credit score.

A credit score is 35% of a consumer’s payment history, with 30% representing the money owed to lenders.

Wardell said: “Managing a healthy credit profile and knowing your credit rights will go a long way in helping individuals ensure they are in a position of making those big purchases one day.” — zisandan@ dispatch.co.za