How Much Credit Card Debt Is Too Much Credit Card Debt?

Get by with a little help from your swipey plastic friend each month? Beware the cost of credit card debt!

Call them 'unprecedented' or any other cliché, but the times we live in are constant only in their susceptibility to rapid change. Top of many people's agenda while living under lockdown in the last year has been managing their finances in the face of potential work cutbacks and lay-offs – and, inevitably, you'd expect people to turn to credit cards to help them make ends meet.

Oddly enough, a report by credit bureau TransUnion shows that the number of both enquiries (when someone requests your credit information from a credit bureau) and originations (the process of applying for credit and the lenders approval or rejection of your application) fell across all major consumer credit categories during the last quarter of 2020. This means that fewer people applied for credit facilities in the last quarter of 2020. 'It also means that lenders are being more cautious about extending credit,' says Carmen Williams, director of research and consulting at TransUnion.

Smart credit

As delinquencies (accounts three or more months overdue) climbed across credit categories, they actually fell 10 basis points, year-on-year for credit cards. 'The relatively stable performance of this category compared to others reflects the relative payment priorities of South African consumers as they focused on preserving the utility of credit cards, especially for online purchases,' says Williams. So while South Africans are keeping a close eye on their credit card balances, they're still using their cards – particularly with the shift to online shopping, which has grown by around 20% in the last year.

Williams says the drop in credit card delinquency versus the growth in delinquencies on credit such as clothing accounts is not a surprise, as delinquency on the latter has been growing rapidly over the last few quarters. 'Credit cards are primarily aimed at lower-risk consumers, while clothing accounts are generally used more by higher-risk consumers,' she says. 'The average balance on a clothing account is generally around R2,000, while credit card balances tend to hover around R19,000. People in higher-risk categories are generally more susceptible to economic shocks like unemployment and rising inflation.'

Credit consideration

TransUnion explains that when a lender assesses a consumer for credit, they don't only look at their credit report and score, they look to understand their affordability via their debt-to-income ratio. That ratio is essentially the sum of your monthly payment commitments (school fees, rent, car repayments, etc) divided by your net monthly income. As TransUnion describes it, 'a ratio of 0 to 20% is considered good, 21 to 40% is evaluated as fair, 41 to 60% is seen to be at risk and 60%+ can be considered overextended'.

Williams says that the rule of thumb is that ratio has to be kept at around 30%, including all your debt – that's the sweet spot. 'Personal circumstances dictate whether that's healthy or not,' she says. For example, if someone still lives with their parents and doesn't need to pay a bond, they could take the bulk of that 30% and allocate it to other credit facilities. 'Every individual's situation is different, which is why lenders take every decision on a case-by-case basis.'

Bond with your bank manager

If you find yourself swimming in credit card debt, the best thing to do is to contact your bank and chat to them about the situation – before the costs and interest start to rack up.

'Lenders are aware that consumers are under pressure, and people will be surprised to see how accommodating they can be in terms of initiating payment plans or payment holidays,' says Williams. 'Banks and lenders are equipped to provide guidance – most consumers have long-standing relationships with banks, and they should leverage those relationships.'

Compare cards

A credit card allows you to borrow money against a line of credit. When you make a purchase with your credit card, you're paying with money borrowed from the bank – and you'll have to pay it back, with interest.

Banks offer different 'levels' of cards, depending on your income and other variables, which come with linked benefits like discounts at partner retailers or loyalty points. There are plenty of choices – and Hippo.co.za is here to help make the choice easier with our Credit Card Comparison Tool. Know what you're signing up for and compare vital details like interest rates and monthly fees.

This article is for informational purposes only and should not be construed as financial, legal or medical advice.