Bankrupt consumers turn to credit cards

More South Africans are applying for credit cards to help make ends meet in the current cost-of-living crisis, but the vast majority are being declined.

Even wealthy consumers are having their opening credit card and personal loan limits reduced as lenders seek to curb risk among this proportion of South Africans who are becoming increasingly dependent on unsecured loans to maintain their living standards.

The latest Experian Consumer Default Index (CDIx) for Q3 showed that there has been a 32% rise in the number of people defaulting, a sign that consumers are struggling even more to meet their debt obligations amidst the rising cost of living.

While, on a quarterly basis, the composite CDIx remained unchanged, this stability, despite high interest rates and reduced lending across all products, was expected as consumers historically tend to pay off debt in preparation for increased spending over November’s Black Friday as well as the festive period. The fact that the reading remained flat as opposed to previous years’ improvement suggests that consumers continue to face financial strain in the credit market, said Jaco van Jaarsveldt, head of commercial strategy and innovation at Experian.

The report also reveals a “significant” year-on-year deterioration in the payment of home loans and credit cards, two products commonly used by high-affluence consumers. This is a continuation of the trend observed over the past 12 months which indicates that the most affluent segment of the market continues to struggle to repay their debts and are increasingly relying on credit cards.

“The sustained high credit application levels suggest that consumers are turning to credit to cover gaps in their cost-of-living expenses. However, despite the high demand, approval levels for new credit application remain low with more than two-thirds of applications for credit being rejected.”

Van Jaarsveldt explained that non-approval is largely due to consumers' inability to afford additional credit commitments as well as credit providers tightening approval criteria as the increased provisions for non-performing debt starts to impact profits.

While new business volumes for unsecured credit, such as retail and personal loans, have not yet recovered to pre-pandemic levels, secured lending products like vehicle and home loans have shown signs of sustained slower growth.

“Lenders seem to be curbing credit risk associated with new business in personal loans and credit cards by reducing opening limits for these products, particularly for high-affluence consumers. This indicates that these consumers are increasingly dependent on unsecured loans to maintain their living standards.”

He added: “As the cost of living continues to rise and the Consumer Default Index continues an upward trend, it is crucial for both consumers and financial institutions to monitor these closely and make informed decisions to navigate this challenging economic landscape.”

The Mercury