Stay smart, stay out of debt

By Staff Writer

It's an exciting time - you're finally earning your own pay cheque and proving you can make it on your own. The things you desire most are within financial reach. But keeping your debt to manageable levels is one of the most important steps you can take to ensuring your dreams turn into reality.

"When it comes to finances, young people are faced with a number of challenges," says Obed Tongoane, Manager at the National Credit Regulator (NCR). "Many have a student loan to pay off, but are lured early on by credit deals which keep them permanently in debt."

He says taking a few common-sense steps can help you manage your debt.

Understand the different types of credit and their cost

Debt is not always bad. "It's important to be able to build up a credit history so that when you want to apply for a car or home loan, credit providers can see that you can manage your finances responsibly," says Tongoane.

"However, make sure you understand the true cost of credit." Unsecured debt, such as credit cards and personal loans are more expensive than secured debt, where assets such as a house, act as security.

This is evident from the amount of interest credit providers are allowed to charge for different types of credit under the National Credit Act (NCA).

On a mortgage agreement, for example, credit providers can charge a maximum interest of 17.1% per year. This is with the repo rate currently at 5.5%.

Compare this to other types of credit such as credit facilities which consist of credit cards, store cards and overdrafts. With these, credit providers can charge a maximum interest of 22.1% per year.

For unsecured credit transactions which consist of mainly personal loans, credit providers can charge a maximum interest of 32.1% per year. If you are looking at buying a car or furniture, then the maximum interest a credit provider can charge is 22.1% per year. You will be charged 5% per month for short term credit transactions. These are loans not exceeding R8 000 and the whole amount is repayable within a period not exceeding 6 months. You will be charged 2% per month for incidental credit agreements.

Credit providers can also charge other cots as stipulated in the National Credit Act. Budget and plan

"Budgeting will assist you to keep track of your finances. The trick is being in control of your finances by creating a monthly budget and seeing how much money you have left over at the end of each month after basic expenses. Remember to always draw a budget and stick to it," adds Tongoane.

"Before credit providers extend credit, they are required to conduct an affordability assessment to assess the consumer's general understanding and appreciation of the risks and costs of the proposed credit; the rights and obligations of a consumer under the credit agreement; debt repayment history as a consumer under credit agreements; and the consumer's existing financial means, prospects and obligations," adds Tongoane.

"When you take up credit, read the small print before you sign up," says Tongoane.

It's tempting to drive a flashy car and wear the latest designer labels, but if you get into a cycle of buying a new car every few years, you'll simply be swapping one loan for another. "If you're going to borrow, invest in a more concrete asset, such as a home or property," he adds.

Know your rights

As a consumer, you have rights and obligations under the National Credit Act. The NCR regulates credit bureaux and the consumer credit information held by the credit bureaux. The Act also assists over-indebted consumers to restructure their debt and aims to prevent over-indebtedness of consumers as well as to encourage responsible lending by credit providers.

"Debt counselling will help you to restructure your debts, but remember you need to continue paying your instalments even when under debt counselling.

Consumers who are facing financial difficulties should try and get help before they even default on their repayments," adds Tongoane.

Reduce your debt over time

If you have negative listings at the credit bureau, you should aim to rectify those. "Avoid being tempted by offers of more loans, especially those that target consumers with poor credit records," says Tongoane.

"Paying off one debt with another is one of the worst things you can do." He advises instead to put a debt reduction plan in place to ensure that you work towards paying off your debt. "Unfortunately there's no quick fix and cleaning up and moving on can take a while, but it is possible," he adds.

"One of the ways to improve your credit rating is by proving your responsibility over time, paying your instalments on time and not taking on too much debt than you can handle," concludes Tongoane.

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