Money and access to credit makes the world go round. It is the basis upon which all people are able to progress, meet their basic and advanced needs, support families, buy homes and vehicles, study, travel, work – pretty much everything needed to have a secure and fulfilling life.
Yet as fundamental as money is to the security of our livelihoods, it is one of the least understood and well-managed essential commodities. Millions of South Africans are drowning in debt that they are struggling to break the back of and have a poor handle on their personal credit management and spending habits. It doesn’t have to be this way!
“Spring is the season of renewal and fresh starts, so use the opportunity to clean out the cobwebs and get a handle on your financial and debt management with a view to making your money and credit work much harder for you, versus the other way round. It’s the perfect time to break old habits and set up a plan that will give you the best chance of financial success when it comes to managing your money, debt and means, for better outcomes,” says Gareth Levinsohn, Chief Commercial Officer of Shapiro Shaik Defries and Associates.
“The best way to take control of your debt is to have a clear plan of what your financial commitments are, how much you pay to service debt and for what benefit (is it good or bad debt?), what your future plans are and whether you’re on track to meet your goals. It’s important to always go back and revisit your financial plan along with your financial commitments and credit arrangements and ensure that you’re on track.”
Here are SSDA’s top tips for cleaning up your credit management and approach to debt:
- Manage your credit score: A crucially important yet often overlooked aspect of personal finance is that of managing your credit score. Your credit score 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 or a student loan. The better your credit score, the less expensive 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. Your credit score also plays a much bigger role that goes beyond ‘banking’’– insurers use credit scores to set premiums and assess your risk profile, landlords use them to decide on rental contracts, employers do employment credit checks before hiring to determine aspects such as character, personal context at the time of screening, a person’s overall level of responsibility and so on – particularly for positions that require high levels of honesty and integrity and the handling of cash or finances, such as in a retail or financial services roles. The bottom line is that your credit score is a vital financial tool that can either be an enabler or hinderance, depending on how well you manage your available credit and debt repayments.
- Pay off your existing debt faster – Debt and credit typically come with interest, which means you will pay more, the longer you take to pay your debt down. If you can, increase the amount you pay back each month. You will be surprised how just a little extra every month will reduce the repayment term and the interest you pay over the term of your loan. Start with your debt that has the highest interest rate. As you pay off one debt or credit arrangement, divert the money you were already used to paying to top up your next repayment, which means you’ll be significantly reducing your term and interest charged. The most important aspect once you are done, is to put the money you were spending on debt repayments into a savings account or investment to provide you with a much-needed emergency fund.
- Always make your debt repayments on time – as a crucial part of maintaining your all-important positive credit score, make sure that all debt repayments and instalments are paid on or before their due date, every time. Late payments will flag and could impact your credit worthiness and terms with your credit provider.
- 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’ personal debt is there to provide a legitimate leg up in life – think buying a home or car (within your means), a student loan to further your education and employability and so on. Bad debt only serves to increase consumption and gets you further into debt – think buying groceries and impulse buys on your credit card, entertainment and eating out, clothing, apparel and so on.
- If you are facing payment difficulties, engage! – If you are facing real difficulties, proactively approach and negotiate with creditors and lenders upfront. If contacted by a collection’s 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 with a loan modification or lower the monthly repayments or interest rates by reaching an agreement with the lender. Discuss your circumstances with the collections agent who will then feedback to the lender to make alternative arrangements where appropriate. But don’t ignore the calls in the hope the debt will go away – it won’t! A lack of any response from you will however see your outstanding debt role into the legal stage and this becomes imminently more challenging and negatively impacts your credit rating and future personal financial health – something that is very challenging to rectify once impaired.
- Retrenched? – You may not even realise that you have credit insurance on some of your loans, retail accounts and credit cards which are there to protect you if you are retrenched and unable to service your debt. Check all your loan agreements and see whether a credit insurance policy is active – these usually are in place for the full term of the loan or credit arrangement. This insurance may cover you for up to 12 months of your debt repayments if you are retrenched, subject to the terms of the policy.
- Get a handle on your spending habits – a lot of spending happens because of habit and impulsivity rather than necessity. Take a good look at your spending habits and avoid those that lead you into unnecessary spending traps. Budget consistently and stay on budget so that you reach your financial goals.
Like all things worth achieving in life, financial fitness and freedom takes planning and commitment. The cumulative impact of all your disciplined cost-cutting measures can have a dramatic impact on your financial position, reducing your debt to manageable levels and freeing up more money that you’re able to save and put away for the future. Start small today, build and use the opportunity to protect the integrity of your financial wellbeing and credit record,” concludes Levinsohn.