How to prepare for rate hikes.

In January this year the South African Reserve Bank (Sarb) hiked its key lending rate by 50 basis points to 5.5%.

Since then Sarb has not announced any further increases, but on more than one occasion governor Gill Marcus has made it clear that consumers can expect the bank's monetary policy committee (MPC) to hold the view that SA is in a rising interest rate cycle.

"The MPC reiterates that a rising interest rate cycle does not mean that rates will be raised at each meeting, or by the same amount each time," Marcus said in May.

Fin24 asked Hein du Plessis, managing director at DebtSafe, to put interest rates in perspective for our users: 

Why should consumers be aware of the interest rate (and its changes)?

In SA the average consumer spends over 75% of their income on debt repayments.

Any upward changes in the interest rate will affect these repayment amounts and will eat into the consumer's available cash.

SA consumers are very vulnerable to changes and consumers need to manage their risks very well in this regard.

Given the present interest rate, the hike earlier in the year and the Sarb warning of more to come, what should consumers do?

Sarb has clearly stated that we are in an upward cycle. Interest rates will rise. 

Consumers need to heed Sarb's words and be pro-active by refining their budgets and making sure they can withstand the impact of the change.

Calculate what an additional 5% or 1% will entail and make sure that the funds are available. If not, adjust your budget so that you are ready.

In the meantime, be very careful about any further borrowing.

It is advisable to stop using credit cards and credit facilities and reduce the outstanding balances to absorb the increase in rates.

How can consumers protect themselves from debt?

There is only one way, and that is to live within your means and to make sure you plan for the unforeseen items.

We can count on one thing and that is that we will have unforeseen expenses.

That is why you need a savings account and a strict and disciplined savings regime.

Also, look after your income and never take it for granted. Do not spend next year’s income by incurring unnecessary debt today.

There is never a guarantee that the income will still be there.

How can they get out of debt or minimise their debt?

Planning, planning and planning. Where the debt was incurred, future income was spent.

A person effectively spends more than they earn to get into debt.

The only way out is to do exactly the opposite, by spending less than you earn so that the additional funds can be used to repay the debt.

Pay the small loans with the highest interest rate first and work your way through to the more "acceptable" loans, like asset finance.

Spend time every month to reconcile your bank account and to check for items you can cut back on. Sometimes it is the small items that make the difference.

Good household financial management is about control, discipline and planning. That's all.

It is not rocket science. Use a calculator and work through your finances.

Plan for next month and make sure you spend less than what you earn.

Please explain debt consolidation and how this can help consumers.

We are not fans of debt consolidation as a solution to debt problems for the following reasons:

- It is further credit and the person is already in trouble because of credit.

We do not believe in borrowing yourself out of trouble.

- Consolidation loans are expensive.

- Consumers sometimes consolidate debt and then just borrow further after that.

They eventually end up in bigger trouble than when they began.

Very few people qualify for a consolidation loan.

Debt counselling

We recommend debt counselling, because it is cheaper, more effective in preventing further borrowing and it creates a plan for the consumer to become debt free.

A good debt counsellor will work with a consumer to reduce debt and also provide for living expenses.

A consumer learns how to plan and budget and the behaviour that led to the over-indebtedness changes in the course of the process. It is inevitable.

Any other trends or advice about debt?

We are noticing that where consumers on average had 10 accounts per applicant in the past, it has now reduced to eight accounts per person.

What is concerning, however, is that the levels of over-indebtedness have not improved.

The only assumption we can make is that some credit providers have targeted the market very aggressively and that more debt is now consolidated into fewer accounts at fewer credit providers.

We have also noticed that consumers now use the debt review process more and more to bring their debt under control, rather than trying to stay in the programme for as long as it takes to repay the last cent.

Consumers are realising that debt in itself is not the culprit, but rather the over-extension of a person.

Debt in itself is not wrong, just the abuse of debt.  www.fin24.com