Get a handle on your debt

As fundamental as money is to our livelihoods, it is one of the least understood and poorly managed essential commodities. Millions of South Africans find themselves struggling with bad debt, have a poor grasp of their spending habits, and don’t actively monitor their credit profile with a view to improving it.

High inflation, rising interest rates and a much higher cost of living are amplifying the strain that many households are experiencing. The time to grab the debt bull by the horns and put a plan in place to manage your recovery is now!

“Spring is the season of fresh starts, so use the opportunity to make a clean break and prioritise your financial and debt management with a view to making your money and credit work much harder for you,” says Tej Desai, chief executive officer of Alefbet Collections & Recoveries, a group of collections firms that includes Shapiro Shaik Defries and Associations, Metro Revenue Collect and ITC Business Administrators.

“The most important starting point is a plan. Get a clear view of all your debt and credit arrangements, know what your financial commitments are, your savings, your spending habits and how much you are paying to service your debt. Also map out your savings alongside your future plans and check whether you are on track to meet your goals. It’s important to revisit your financial plan regularly and update your progress along with your financial commitments and credit arrangements.”

Here are Desai’s top tips for cleaning up your credit management and approach to debt:

● Know your credit score.

Many banks offer credit score health checks as a free service on their banking apps, or you can make use of a credit bureau for a free credit check. Your credit score is important, as it determines what loans you can get and the interest rates that you will pay, especially on big-ticket items – think buying a home or car. The better your credit score, the lower your debt repayments will be as you’ll qualify for the best possible terms and interest rate due to your lower risk to the credit provider.

● Always make your debt repayments on time.

A crucial part of maintaining your positive credit score is to ensure that all debt repayments and instalments are paid on or before their due date, every time, and at the very least that the minimum payment is made. Late payments will flag and impact your creditworthiness and terms with your credit provider. Set payment reminders if you need to, but don’t miss the payment dates.

● Pay off your expensive debt faster.

Debt and credit come with interest, which means that the longer you take to pay your debt down, the more you will pay. Rising interest rates mean that your monthly repayments will increase if linked to a variable interest rate. If you can, increase the amount you pay back each month, starting with the debt that has the highest interest rate. As you pay off one debt or credit arrangement, divert the money you were paying to pay off your next debt. When you are finally done, put the money you were spending on debt repayments into a tax-free savings account or investment to provide you with an emergency fund.

● There is good and bad debt – know the difference.

Be circumspect about the type of debt you are prepared to enter into. Remember that “good” debt can provide a legitimate leg up in life – think buying a home or car (within your means) or a student loan to further your education and employability. “Bad” debt serves to increase consumption and gets you further into debt – think buying groceries and impulse-buys on your credit card, entertainment and eating out, and clothing.

● Get a handle on your spending habits.

Take a good look at your spending habits and avoid those that lead you into unnecessary and impulsive spending traps. Budget consistently and stay on budget. If you are in a financial bind, it’s important to cut the consumption traps that only get you into further bad debt – like impulse buys on your credit card.

● If you are facing payment difficulties, engage!

If you are facing real difficulties with paying your debts, proactively approach and negotiate with creditors and lenders upfront. If contacted by a collections agent, explain your situation so they can work with you to find a solution. Different types of debt have different options – you might be able to temporarily suspend payments or lower your monthly repayments or interest rates by reaching an agreement with the lender. But don’t ignore calls from creditors or collections agents in the hope your problems will go away – they won’t! A lack of any response from you will result in legal action, which is imminently more challenging and negatively impacts your credit rating and future personal financial health – something that is very challenging to rectify once impaired.