Good news for South Africans with debt

With the economy showing signs of a turnaround, consumers can take advantage of improved conditions to reduce their debt, but they need to be careful not to use this time as an opportunity to take on more credit.

This is feedback from John Manyike, Head of Financial Education at Old Mutual, who said that even though external forces may derail progress, the current outlook for South African households is positive.

This optimism was boosted by President Cyril Ramaphosa in his State of the Nation Address on 6 February 2025.

During his address, he spoke about the Government of National Unity’s Medium Term Development Plan to “drive inclusive growth and job creation, reduce poverty and tackle the high cost of living, and build a capable, ethical and developmental state”.

A primary factor in the economic turnaround has been the decline in inflation over the past two years and the consequent reversal of the interest rate cycle, Manyike noted.

After reaching highs of around 7.5% at the end of 2022, Consumer Price Index inflation hit a low of 2.8% in October 2024, and economists expect it to stabilise at about 4.5%, according to the Bureau for Economic Research.

In response, the SA Reserve Bank has gradually lowered the repo rate, from 8.25% in the middle of 2024 to 7.5% in January 2025.

However, South Africa’s household debt-to-income ratio – the average percentage of disposable household income that goes towards paying off debt – remains unacceptably high, Manyike said.

In fact, the ratio increased slightly, from 62.1% in the second quarter of 2024 to 62.2% in the third quarter, according to the Reserve Bank’s latest Quarterly Bulletin.

Manyike said that as economic conditions improve, your debt should become easier to manage. However, the key is to avoid taking on more credit, which is tempting to do at lower rates.

FNB Retail Loans CEO MJ Davis echoed this sentiment and warned that South Africans should avoid using the current rate-cutting cycle as an opportunity to take on bad debt.

Davis explained that the Reserve Bank’s recent decision to lower interest rates by 25 basis points for the third time in six months may provide some much-welcomed relief for South Africans with debt.

“The high-interest rate environment of the past couple of years affected the cash flow of many South African households,” he said.

“Consumers are counting on these rate cuts to offer them some financial reprieve as they continue their money management efforts.”

He added that reduced borrowing costs and lower monthly repayments due to rate cuts have tremendous potential to free up cash flow and prevent the average person from falling into further financial distress.

Apart from not taking on extra credit, Manyike explained that there are a number of other things South Africans can do to improve their debt situation.

First, he recommended that people should keep track of their expenses.

“Track your spending patterns by analysing your bank statement and drawing up a realistic monthly budget.”

“Prioritise your expenses according to your needs, not your wants. This will help you to cut non-essential spending.”

Manyike added that if the rate drops on your bond or loan, you should keep your payments constant.

“While remaining level financially, you can substantially reduce the term of the loan.”

Avoiding building debt on your credit card is another good way to approach debt management, he explained.

“Try to pay off the full amount on your credit card each month.”

“This type of debt has a high interest rate, and if you pay only the minimum required monthly amount, the balance owing builds up very quickly, with compounding working against you.”

Finally, Manyike said that South Africans should try the snowball method to reduce debt.

This, he explained, involves first paying off the smaller debts that have higher interest rates, such as credit card balances, store accounts and personal loans.

The money you save when these are paid off then goes towards larger debts such as vehicle loans and your mortgage bond.

“The average household uses almost two-thirds of its income to service debt. That is unacceptably high – South Africans must learn to live within their means.”