When a country has been downgraded to junk status, it means that the rating agencies believe that it won’t be able to meet its debt obligations.
This increases the country’s borrowing cost because lenders will view it as high risk. Therefore, when the downgraded country borrows from other lenders, it will pay higher interest rates. This, in turn, affects you as a consumer because you’ll be left to pay higher taxes to help the government service its debt.
The rand will also weaken, which affects the prices you pay for goods. The cost of goods, such as petrol and other imports, will also increase, placing more financial pressure on the consumer.
But how does it affect the way you manage your debt?
Increased reliance on debt
When you can’t afford to buy the things that you want, you not only start looking at your credit card for a bail out, but you start shopping for credit, sometimes in the wrong places. This not only increases your debt but also the increases the risk of an unfavourable credit score.
Credit utilisation plays a big role in your credit score. If you use more than 30% of your credit limit, creditors will see that you’re too reliant on credit and they will not give you any more credit or you‘ll be charged higher interest rates.
As the cost of food increases, many people will find themselves allocating their money towards food, leaving little towards their debt. Some may skip their payments or halt it completely.
Skipping payments increases your debt because you’ll end up paying compound interest when you finally pay it back. Your credit score will also drop by a significant percentage. As a result, you may find yourself unable to obtain more credit or you’ll end up paying a higher interest.
Keeping up with increased interest rates
When the country’s economy is downgraded to junk status, interest rates go up. The interest you pay for a loan will increase. This becomes harder if you have an existing loan with a flexible interest rate.
A flexible interest rate means that the interest you pay is influenced by the repo rate. If the repo rate increases, so will your interest – and vice versa. So, if your interest is flexible, you’ll have to rework your budget and allocate more funds towards your debt instalments. If your interest rate is fixed, there’s no need to worry, as your instalments will stay the same.
If you find yourself unable to pay your debt, it’s important to speak to your creditor about adjusting your instalments or consider applying for a payment holiday. Other options include speaking to a debt counsellor about how your instalments can be reduced. If you qualify for debt counselling, a debt counsellor can also negotiate lower interest rates with your creditor on your behalf.
DebtBusters can help you manage your debt better. We have qualified debt counsellors who’ll assess your financial situation and prescribe the best debt solution for you. Call us on 086 999 0606 or send us an email at [email protected].