Beware the debt trap as price hikes bite

Johannesburg – With rocketing food, fuel, electricity and other prices, more and more analysts are warning South Africans against falling into the debt trap.

Automobile Association spokesperson Gary Ronald this week warned motorists that they can expect the fuel price to peak at about R13.50 to R14.00 per litre this year, with a chance of the pump price spiking to R15/l depending on politics and the US economy.

With the latest increase of 10c and 12c /l at the coast and in Gauteng respectively, the petrol price has risen by R1.32 and R1.34 respectively so far this year.

Last year motorists in total paid R1.35 and R1.40 more for a litre of 93 ULP and 95 ULP respectively, and R1.35/l more for 95 unleaded and LRP.

Fuel cost between R8.46 and R8.73 at the start of 2011 and ended the year at between R10.32 and R10.66. The highest price motorists paid in 2009 for a litre of petrol was R8.05, after starting the year as low as R5.68 for a litre of 93 unleaded.

Knock-on effect

But it doesn’t end here for consumers. The knock-on effect of a higher petrol price is far greater, the experts warn.

Jason Garner of financial advisory company Acsis said that with the petrol price increases as well as the 8% hike in electricity tariffs, most consumers’ savings and debt levels will take a knock in the coming months.

“The situation for consumers will only worsen if they do not factor these increases into their budgets.”

Debt Rescue CEO Neil Roets shared Garner’s concerns, adding that the fuel price increase is going to be the last straw that breaks the camel’s back.

A petrol price increase has a domino effect on on the price of most goods and services, such as food and public transport which is used by a large portion of South Africans, they agree.

Debt levels

It is clear that consumers are already struggling with high debt levels, with the Reserve Bank reporting that the household debt to income ratio was 76% in the third quarter of 2012, Garner said.

Not only is the cost of living going up, but the increasing pressure of further price hikes on top of households’ monthly expenses – such as medical aid, mortgage repayments and school fees – means that more consumers are turning to credit to fund their lifestyles, he said.

Roets noted that many consumers have reached the point where their credit records are so impaired that no legitimate microlender will take them on.

“Their only option is to seek out loans at extortionate rates from illegal loans sharks that are still widespread in especially rural areas.”

According to the fourth-quarter 2012 Consumer Credit Market Report, unsecured credit agreements increased by 11.94% and short-term credit showed a quarter-on-quarter increase of 27.22%.

Tax relief

Despite the personal income tax relief of R7bn announced by Finance Minister Pravin Gordhan in his National Budget speech in February, Garner said that because of inflation, consumers are actually slightly worse off than the year before.

He said the disparity between tax relief and actual inflation in the hands of consumers is widening anually. Garner explained that in 2012 the average increase in medical aid costs ranged between 7.9% and 11.9%. But Gordhan allowed a 5.2% increase in tax credits for medical aid contributions, while consumer price inflation is at 5.6%.

“Most of the adjustments in the budget simply won’t assist the average person on the street to close the gap between costs and income,” Garner said.

Financial planning

“In light of these increases, it is important that consumers improve their ability to spend within their means and save accordingly to cope financially without having to rely on credit cards, overdrafts or any other form of debts,” said Garner.

He advised consumers to adjust spending habits to reduce expenses. “Consumers should break down their spending into three basic categories, namely the must-haves, the nice-to-haves and the luxury items.”

Must-haves include critical things such as groceries and rent.

The nice-to-haves include items that make consumers’ lives easier and more enjoyable, such as shopping at convenient shops and entertainment, while luxury items include costs that don’t need to be spent, such as buying a new car and luxurious clothing.

This way consumers can cut back on unnecessary spending, Garner added.

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