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South Africa’s millennials and Generation Z are increasingly resorting to credit cards to augment their salaries as the cost of living soars.
The Industry Insights report by the consumer credit reporting agency TransUnion for the first quarter of 2023 showed a strong growth of 27.1% year-on-year in credit card demand, driven by those born between 1980 and 2010.
“Look at inflation and fuel prices, which are largely inflation-driven, they are through the roof,” said Weihan Sun, the director of financial services research and consulting at TransUnion Africa.
“It costs a lot of money for us to just maintain our lifestyle.”
Consumer inflation retreated to its lowest level in 20 months in June, data from Statistics South Africa showed on Wednesday, cooling to 5.4% year-on-year from 6.3% in May. But prices remain uncomfortably high, driven mainly by the country’s electricity crunch and the rand’s weakness.
Before the prevailing cost of living crisis, consumers used credit cards mostly as additional liquidity to purchase large items such as washing machines, Sun noted.
“But the problem is we’re now using credit to pay for necessities, because I literally have to buy bread today or buy groceries for the month with my credit card because my income is not growing at the same rate as the cost of goods.”
He added: “We’re seeing a lot of consumers leveraging credit for basic goods.”
Clearing house Bankserv Africa’s latest Take Home Pay Index for May showed that the purchasing power of the average salaried worker has flattened. Real take-home pay fell to R13 416 a month in May, or 8.8% lower on a year-on-year basis and the lowest level on record.
“An environment of such low confidence is not conducive for job creation or comfortable wage increases,” said independent economist Elize Kruger.
Even those consumers who don’t qualify for credit cards will go to a retailer and buy clothes on credit, Sun noted. This is a problem because many of them then have trouble paying back the money.
“We saw significant growth in new business for clothing accounts, just as there was a notable increase in outstanding balances, likely driven by existing account holders leveraging their accounts more frequently as a result of higher prices driven by inflation,” he said.
Current trends are pointing to a shift from cash to credit purchases in response to ongoing economic pressures, with an uptick in consumers missing payments by 30 days.
“At the moment it’s still not a disaster but it is becoming more and more problematic as we continue to see credit balances growing without people paying back at the same rate,” Sun said.
A combination of high inflation and higher interest rate hikes tends to hit lower-income groups the hardest and these are usually younger people, said Citibank economist Gina Schoeman.
“These are all of the things coming together that make the youth of South Africa very vulnerable. And then you have banks, unsecured credit, credit cards all presenting a solution for these young people,” she said.
In its results for the six months ended March, African Bank said demand for credit had continued to grow, despite the ratcheting-up of interest rates.
This was flagged in the South African Reserve Bank’s Financial Stability Review published in late May.
Although credit cards are granted to people who initially can afford them, one can never say how that person will pay off the money, Schoeman noted. That is the risk that banks take, but it is also the reason the interest rate that comes with a credit card is steep.
Young people have become less economically active than they were a decade ago. A report released this week by Lightstone, a provider of data, analytics and systems on property, cars and business assets, shows that young people are buying fewer properties and the proportion of cars being sold to that cohort is also down significantly from 10 years ago.
In 2012, those under the age of 35 accounted for 39% of new car purchases and 45% of property purchases above R20 000. By 2022, these numbers had dropped to 31% and 38%, respectively.
Transfers for properties worth more than R20 000 to young people have declined from 87 675 (45%) in 2012 to 81 519 (40%) in 2017 and 69 304 (38%) in 2022.
“Property sales suggest, in addition to declining property transfers, those under 35 are switching to the lifestyle benefits offered by sectional title properties, they are buying later with the average age of first time buyers being higher than it was ten years ago, and they are increasingly buying solo” said Hayley Ivins-Downes, head of digital at Lightstone Property.