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The Struggle Is Real

Young South Africans are having a tough time getting retail credit these days.

Most young people tend to enter the credit market by opening a store account with one of the main retailers. Their parents or friends encourage them to start building a credit profile, by buying a few pieces of clothing on account and paying it off responsibly.  Later on, these young consumers begin to get access to bigger credit as they enter the workforce.

Of course, things have changed over the years and particularly since the Covid Pandemic. Retailers and banks are less likely to grant young people credit. Retailers are currently giving out about 40% less credit to first time applicants compared to before.

The problem is that this portion of the market is very risky, although they access smaller amounts of credit.  According to Experian, the default rate for young people with credit is currently around 16.8%, not great. Still, it is better than it was last year when it was sitting at 21.9%.

You can see the risk profile of lending to these young people is high, and most credit providers have been very strict with avoiding risk recently. They simply cannot afford to lend to those who won’t repay in the wake of the pandemic.

How Do You Bring Young People Into The Credit Market?

Holding back from lending to young people creates a bit of a negative loop.

If you do not lend to young people, and teaching them to be responsible credit users now, then you do not know if you can lend them bigger amounts in the future.  Also, if you don’t lend to them now, they may never come back down the line. The competition for new credit users is tough.

Normally, about 80% of young people’s credit is tied to retail and clothing store accounts, showing they rely heavily on this type of credit.

And with the retailers holding back on granting these young people credit, they are either shopping elsewhere (dropping sales) or using other sources of finance, like money from the banks (who then make the profit on the credit). So, retailers are also stuck in a tough spot. Will they lend or not?

Recently some banks, like Capitec, have said that they intend to loosen the requirements and are now prepared to start taking on slightly more risky clients in an effort to grow their book. Retailers may have to follow suit as across the industry their sales have shrunk dramatically due to consumers running out of disposable income.

Slowly Does It

If you are a young person (or have teenagers at home) then learning how to make smart use of credit is a crucial life skill that you sadly will not really learn at school, or until you do get access to some credit.

So, when you do get access to credit, try to use it as an opportunity to learn to manage your finances well. Don’t get carried away overinvesting in your drip and then have to go to the folks for money to pay your creditors.

Slowly does it.