Beware! With fulltime employment, creditors are eager to help you accumulate debt.
As a young professional it is easy to get caught up in all the ‘must-haves’ such as shiny wheels, a branded briefcase or expensive shoes. All bought on credit of course!
However, once you have bought all the trappings a young professional needs, you can end up with a mountain of debt that you probably will not be able to afford to pay off.
Christiaan Coetzee, CEO of FinFix, says starting your professional journey is exciting with a steady income, financial independence and the ability to finally say yes to things you have been putting off until you start working fulltime.
“But with this newfound freedom comes responsibility, especially when it comes to credit. South African youth are increasingly vulnerable to debt traps, often lured by the promise of ‘buy now, pay later’ without fully understanding the consequences,” he warns.
ALSO READ: Will South African youth achieve financial freedom? — Tomorrow’s leaders drowning in debt today
Uptick in debt among young professionals
Recent data indicates a significant uptick in credit usage among young South Africans. According to TransUnion’s Industry Insights Report for the second quarter of 2024, the number of credit-active consumers grew by 4.7% year-over-year to 18.5 million, with Millennials and Gen Z accounting for 62% of new credit originations during the quarter.
Notably, Gen Z’s share of new credit card accounts increased by 22.7% year-over-year. Coetzee points out that while access to credit can be a powerful tool for building a financial future, it also poses risks if not managed carefully.
The same report highlights that 33% of consumers intend to apply for a new personal loan in the next 12 months, indicating a growing reliance on credit to manage day-to-day expenses. Therefore, Coetzee says, understanding how to navigate this credit landscape is crucial to avoid falling into debt traps that can be obstacles to your financial goals.
ALSO READ: ‘Under pressure’: South Africans struggling to keep up with debt repayments
Coetzee has these five practical strategies for young people to stay out of the debt trap to keep in mind:
1: Understand the full cost of credit and debt
“Remember credit is not free money. Whether it is a credit card, clothing account, or personal loan, each comes with interest rates, initiation fees and service charges that can accumulate quickly.”
For instance, a personal loan from a non-bank lender carries a delinquency rate of 40.6%, indicating higher risk and potential cost. Delinquency means if you do not pay.
Before committing to any credit agreement, request a detailed breakdown of the total repayment amount and compare it to the cash price to understand the true cost and see if you can afford it.
2: Live within your means
It is tempting to upgrade your lifestyle with your first pay and buy new gadgets, trendy clothes, a fancy car or go on more outings. However, Coetzee warns that succumbing to lifestyle inflation can lead to overreliance on credit.
The TransUnion Consumer Pulse Study found that 52% of consumers have cut back on discretionary spending, indicating a need to prioritise essential expenses.
Coetzee says it is a good idea to consider implementing the 50/30/20 rule, where you allocate 50% of your income to needs, 30% to wants and 20% to savings and debt repayments.
ALSO READ: Leaving the nest? Here are 5 harsh financial truths to remember
3: Build and stick to a budget to avoid too much debt
Budgeting empowers you to take control of your finances by providing a clear picture of your income and expenses.
With the rising cost of living, many South Africans are turning to credit to manage expenses, but Coetzee says it is better to use budgeting tools or apps to track your spending and identify areas where you can cut back, to ensure you live within your means.
4: Keep an eye on your credit score
Your credit score affects your ability to secure loans, rent an apartment and can even affect your employment opportunities. You are entitled to one free credit report every year, allowing you to monitor your financial health.
Make sure that you regularly check your credit report to identify errors or signs of identity theft and take steps to improve your score by paying bills on time and reducing outstanding debts.
ALSO READ: Debt Review: The good, the bad and the ugly
5: Get help with your debt before it is too late
If you still find that you are struggling with debt, remember you are not alone. The National Credit Regulator reports that 18.1 million people applied for credit in the third quarter of 2024, a 3% increase from the previous quarter.
Coetzee says you can reach out to organisations like FinFix for financial education workshops, one-on-one credit coaching and practical tools to help you manage and overcome debt.
Empowering your financial future
Credit, when used responsibly, can be a valuable asset in building your financial future. However, Coetzee says, mismanagement can lead to long-term debt and financial stress.
“By understanding the true cost of credit and monitoring your credit score, you can avoid the debt trap and achieve financial stability. Consider speaking to a registered financial adviser who can help you structure a plan tailored to your income, goals and debt profile.”
