By Essie Bester

Debt in South Africa has increased astronomically and households are generally in dire straits. Statistics show approximately ten million people have bad debt, with more than three months’ payments in arrears, and furthermore that people spend more than 70% of their spendable income on debt that has to be repaid. They are therefore caught in a debt trap.

Anyone can land in a severe debt situation. However, we stand before a unique challenge – a consumer culture that continuously drives immediate satisfaction. Combine this with the easy access to credit and you can easily lose control over your finances, warns Carla Oberholzer of DebtSafe.

Get your debt under control by:

1. Revising your financial situation

Answer the following three questions:

What is my monthly income amount after deductions?

What does my payment history on my bank statements indicate to me?

What does my credit record show?

Your credit report and your credit score are both free, provided you request it only once per year. You can request your credit score from any of the three credit bureaux that report about consumer credit the most – Experian, Equifax and TransUnion.

However, not all free credit score services are totally free – some may insist that you report for a credit monitoring service which is accompanied by a monthly levy if you don’t succeed in cancelling it.

Have a look at your credit score and review your credit report for inaccuracies, and identify the accounts that adversely affect your score. Remember, it takes only one or two late payments (even if you pay meticulously although not on time) to shift a consumer’s loan from a good score to a bad score.

2. Compare your current income amount with your debt amounts

Add up all your monthly debt.

Divide it through your income amount before deductions.

The final percentage shows your debt-to-income ratio. Any percentage above 40 is a danger signal.

3. Prioritise

This means you have to identify pernicious (bad) debt and use your budget to find ways to pay off this kind of debt faster, while still meeting your other monthly obligations.

Financial experts advise us to set realistic goals while starting to pay off the debt with the highest interest first. A credit card is ‘expensive’ debt. As soon as this has been paid off, you can keep a single credit card for emergencies and get rid of the rest.

Ideally speaking, you should try building an emergency fund for yourself by saving for it monthly. Studies show that credit cards play a significant role in consumers’ bankruptcy.

Warning: When you are deep in debt, the closing of cards harm your credit score as it decreases your total amount of available credit and increases your credit utilisation rate. So don’t close your credit cards now.

4. Begin with damage control

Compile a stricter budget and make use of automatic payments to get your debt under control. If your credit score allows it, you can try to obtain a bigger loan at lower interest. Then consolidate all your consumer debt and in this way speed up the payment process.

You can also try to apply for a credit card balance transfer and consolidate your debt on one card. This can enable you to pay off debt quicker by transferring high-interest debt to a credit card account with low or no interest on the balance, for a period from six to 18 months, depending on the offer. However, if you haven’t paid off the balance by the end of the grace period, you can expect high credit card interest rates.

If you have access to a home equity credit line (HELOC), that has lower interest rates than most other forms of credit – you can also use it to pay off debt with higher interest.

5. Double your repayments

Use any extra income (such as bonuses or a thirteenth cheque) to pay off debt.

6. Take responsibility

If your debt is just too much, it might be time for a few drastic measures. Scale down your expenses on entertainment and sell non-essential items. Any money collected by these sales should be applied as single-amount payments against your loan with the highest interest.

7. Consult experts

Consider a debt counsellor who is regulated by the National Credit Regulator (NCR). You pay counselling fees, but a debt counsellor can provide you with many handy tips, make sure you are on the right path with your repayment plans, and offer support when you meet with creditors.

8. Negotiate

If you aren’t under debt counselling and want to negotiate with creditors about a repayment plan yourself, you have to do your homework ahead of time and compile a budget to settle your debt.

As soon as you have all your documents in order, you have to set a time when you can meet with each of your creditors. Explain the steps you have already taken to prevent payment of your debt falling behind and ask to renegotiate about your debt – see to it that the settlement is in writing.

Debt can make you anxious and have an influence on your relationships, your health and your self-image. However, with assistance and good planning you can break the debt chain. With the above tips you can take the bull by the horns before your burden of debt starts destroying your life.

Sources:

https://www.investopedia.com/personal-finance/digging-out-of-debt/

https://akademia.ac.za/2020/07/17/wenke-om-skuld-af-te-betaal/

https://www.netwerk24.com/netwerk24/kuier/geldsake-raad-vir-hoe-om-jou-skuld-te-bestuur-20211231