Don't touch that credit card
JOHANNESBURG – It goes without saying that the cost of living has risen this year at a rate alarming to most ordinary South Africans.
We don’t need to list all the factors because, well, we’re living with them!
As we near that time of the year when consumers would ordinarily go on a buying splurge, it’s worth considering that there has been a downward trend in festive season shopping in certain sectors in the last few years.
“Consumers hit by high Christmas food prices cut back on meat purchases [in December 2017] and were less inclined to splurge on discretionary goods, instead of searching for deals and promotions,” says Sarah Quinlan, Senior Vice President Market Insights for Mastercard.
Coupled with significant increases in petrol and the VAT hike the cost of living has risen to a level where many more people are unable to save, and worse, are using credit cards, loans, and store cards to get by.
While it does seem as if consumers are trending more toward conservative spending habits ‐ the National Credit Regulator says that more than 60% of South Africa’s 25 million “credit‐active” citizens are in “good standing” and keeping up with their loan repayments ‐ but too many are still in the red. Almost 40%, in fact, is behind with repayments.
Much of this is because consumers are still opting to purchase high‐end products on credit and end up causing significantly more pain to their pockets. But is credit the only option for South Africans without cash at hand when making big purchases? Let’s consider this.
Interest on credit cards can range anywhere from 14% to the maximum 24%. As a result, South Africans would do well not to use this facility to buy luxury items. Consider this: the average take‐home pay in the country is R13 621. With the cost of living and maintaining a certain lifestyle continuing to rise far beyond the aforementioned figure, it’s understandable that consumers use their credit cards to pay for things like an R10 000 smartphone or TV.
The problem is that money needs to be paid back. With lines of credit being far higher than take‐home pay, consumers end up in a seemingly never‐ending spiral of debt. In essence, if you don’t think you can pay that amount back before the interest charges hit, then you’d be better off not buying the item with your credit card.
Many retailers have been hit by the National Credit Regulator with heavy fines for charging customers hidden fees and interest rates not clearly stated in the paperwork.
While some store cards do offer long periods with interest‐free repayments, consumers should always read the fine print so they won’t be hit by sudden fees later on.
As with credit cards, consumers need to do their homework on the interest rates charged by retailers, which can often be higher than the rate charged on many credit cards. At least two household appliance and tech retailers charge consumers as much as 23.2% interest per annum.
If you do opt to purchase with a store card, know exactly what you’re signing up for and make sure you have the budget to accommodate the costs involved.
Rent to own
This is a somewhat lesser‐known purchasing model in South Africa. In the US, however, renting-to‐own (RTO) household appliances and tech products are very popular with middle‐income earners who don’t have large amounts of cash on hand.
A major South African online retailer that offers this buying plan is Teljoy, the company that first brought TVs into local households.
“Rent-to-own is essentially a month-to-month contract that allows a customer to rent appliances, furniture and electronics in a single monthly fee. The customer has the option to upgrade, downgrade or cancel at any time”, Teljoy Customer Experience Manager, Desiree Dickinson explains.
Being able to upgrade during the period of the contract is particularly beneficial for people who want to keep up with rapid advances in technology but see new products on the market before they have paid off their current items. This is especially true for laptops, tablets and TVs,” Dickinson says.
In addition, should the customer’s financial circumstances and needs change, they may even cancel the contract at any time? “Unlike a credit contract, you are not locked in and forced to continue paying even if your financial situation has weakened,” Dickinson explains.
She says that the consumer is aware upfront of the amount they will pay each month as well as the length of time for payment. That figure also isn’t affected by fluctuating interest rates.
“It’s designed specifically for middle‐ and lower‐income customers who don’t have thousands of Rands at hand to spend on appliances or tech and who also don’t want to rack up debt,” Dickinson concludes, commenting on the flexibility of the contract is an added bonus. ”This model suits one’s lifestyle changes – something you definitely can’t get with hire purchase,” said Dickinson.