September 16, 2014
Living with debt? Never fear, here’s our easy-peasy guide to help you get out of the red and start saving. So read this before you next close your eyes and hope for the best as the cashier swipes your credit card for that pair of heels you simply have to have…
Here’s a fun fact: according to the FinScope SA 2013 Consumer Survey, 14.2 million South Africans have some form of credit or loan. Of this, an alarming 4.7 million are over-indebted. What’s worse is that most of us who are in debt owe money to up to six or seven creditors. And that number is set to increase, according to Nonhlanhla Zaba, a financial advisor at Liberty Group, as debt becomes easier to get as a young, first-time salary earner. If you’ve found yourself sliding into bad debt or are already caught in the debt trap… breathe. Nonhlanhla tells us how best to get out of the debt trap while still enjoying life’s little luxuries…
If you regularly spend more than you earn, get calls on a regular basis from debt collectors, have high stress levels, feel depressed and have started ignoring your monthly bills, then you’re probably trapped by your debt.
Denial is a powerful thing. It can give you the illusion that you can keep on spending, incurring more debt, in the belief that one day in the distant future you will finally decide to start paying it off. But not before you get the latest smartphone on the market, right?
“A lot of people don’t understand the power of compound interest,” Nonhlanhla explains. “Interest on debt has a negative impact on your money as you pay double or triple the amount you actually owe.”
Confused? Say you’ve been eyeing a gorgeous handbag and you finally buy it – by swiping R5 000 on your credit card. If you pay it off over a couple of months, including interest, you’ll have spent up to R15 000. Makes you think, doesn’t it?
“Unfortunately young people are easier targets,” says Nonhlanhla. “Creditors provide young professionals with credit facilities such as credit cards or clothing accounts, but some of them don’t know how to manage their money.”
She goes on to explain that the younger generation assumes that just being given credit assists their credit rating, but this is not so. If you don’t manage that credit correctly, it damages your rating.
Most South Africans who have loans and credit are contributing more than 70 percent of their salaries to their monthly debit orders, leaving them with little to survive on for the rest of the month. Cue the credit card that was meant for emergencies but is instead being used as a means of survival.
Nonhlanhla cautions that the worst thing you can do as a consumer is to not pay back your credit at all.
“This will put your credit rating at risk. Once you have a bad record, it’s quite difficult to clear, and this can make it harder, or even impossible, for you to borrow money in the future for things that are important, such as buying a house.
“You also run the risk of losing your property, or any other assets you may have, to pay off your bad debts.”
The idea of debt seems like a catch 22. To get a good credit rating, one needs to get credit. That’s why, as Nonhlanhla explains, there is such a thing as good debt.
“Buying a home is usually considered a good investment; it’s an asset that will outweigh the upfront cost over the years. It is also advisable to pay off your own investment instead of renting, where you are paying off someone else’s investment.”
Many graduates opt for a clothing account to try and get their credit record going. While this may seem like a good idea initially, as you have the option of paying back your debt over six months interest free, many get sucked into maxing out the account and having to pay back exorbitant monthly instalments.
The first step to getting out of the debt trap is identifying that you’re in it. “Start by being aware of your financial situation, prioritise your debt repayments, and arrange with your creditors to reduce the payments where possible,” advises Nonhlanhla.
Don’t be afraid to sell the stuff you don’t need to make extra cash, and get help if you need it. This is where a financial advisor can also be helpful – sometimes we just need someone to remind us to think before we swipe…
Don’t wait till you’re drowning in debt to get a financial advisor. An FA will guide you through your financial journey, advising you on how to spend your hard-earned cash.
Make the decision to stop borrowing money.
List all your debts, from the lowest to the highest balance, and pay off debts with the lowest balances first. Baby steps… After paying off the first debt, use that amount to pay off the second debt by increasing your debit order amount by the first debt instalment.
If you get excess cash, put that money towards your debt payoff plan. Ask your bank to help you consolidate your debt and help you work out a payment plan.
Keep in mind that debts with higher interest rates are dangerous things to leave unpaid… Remember that compound interest thing?