Eunice Sibiya, head of consumer education at First National Bank (FNB) points out that there are several warning signs for if you have taken on too much debt. These include skipping repayments, borrowing money to pay off debts, as well as using your credit card to purchase essential items.
How much should you spend on your debt?
Most commentators agree that keeping debt repayments to no more than 30% of net income is the most prudent way to handle debt. Pragnesh Desai, credit risk management and monitoring at Nedbank, notes: “[Nedbank] would advise clients to keep debt at no more than 30% of their net income as this enables one to maintain a good grip of their finances and provides an opportunity to service the debt responsibly, with the view to ultimately pay it off.”
Graham Knight, a financial consultant at Alexander Forbes Financial Services agrees, stating: “The general rule is no more than 30% of your salary should go [towards] repaying your big debts [such as a] house and car. This, however, can be difficult to achieve. The debt that should be avoided is credit card and personal loan debt. The interest charged [is] usually more than 20% per annum.”
However, Knight adds: “As a rule of thumb I wouldn’t dedicate more than 50% of my salary to debt. Unfortunately most consumers are dedicating nearly 90% of their salary to debt repayments. This leaves no room to invest and save money.”
Experian credit bureau also agrees that credit repayments should be kept between 20% and 30%. It provides the example, if you earn R5 000 per month, you should keep your monthly credit repayments to within R1 000 and R1 500.
Speaking to your credit providers
“If you are unable to make payment [to your credit provider] due to unforeseen circumstances, call or write a letter to explain your situation and make alternative arrangements to pay what you owe. Ignoring letter of demands or summons will have a serious reflection on your credit profile,” highlights Experian.
Desai agrees, stating: “If you have financial difficulties, speak to those you owe money to. They will be more understanding if they see you have a plan and are prepared to make sacrifices and they could possibly assist in rearranging or restructuring your debt.”
Tips for servicing your debt
Below are some tips to help reduce debt, avoid debt traps, and help you take control of your finances.
- Draw up a list of your expenses and calculate how much you spend. Then compare this to your monthly income. Knight suggests arranging your debt in order from the smallest to largest amount.
- Prioritise your expenses. You need to decide what expenses are essentials and which are optional or discretionary.
- “Assess each debt, its terms of repayment, interest you are paying monthly and what the debt costs you over its lifetime,” says Desai.
- Consolidate your debt where possible. Desai suggests: “Borrow enough from your bank to pay off smaller, more expenses debts in one go. This way you’ll save money and then have only one creditor, the bank.”
- After paying off credit cards and store cards, close the accounts and destroy the cards so that you don’t use them again.
- According to Desai, if you have high interest or high value debt you should pay this off first, “as the interest you pay on your debt is likely to be higher than any returns you will receive on a sound investment.”
- Ensure that you live within your means.
- Bring in some extra money by taking on a second job or starting a hobby that could generate an income.
- “Use cash instead of credit, research shows this behaviour will help you save [between 12% and] 18% whenever you shop,” reveals Desai.
- If you are not managing your debt on your own, get professional assistance from a debt counsellor or your bank.
- To ensure that you don’t fall back into your old spend habits, Desai suggests that you budget for small, inexpensive rewards.
- To avoid falling into arrears with your credit providers, Experian notes that it is important that you pay your monthly instalments in full.
Knight suggests that once you have drawn up a list of your debt, you should start with paying off the smallest outstanding amount first. Then starting paying off the second amount on your list. Once you have paid off both amounts, combine the monthly instalments you were paying to pay off the third outstanding debt on your list.
“Once the second amount is paid off, use both instalments and add it to the instalment of the third smallest debt. This enables you to pay the third debt off even quicker,” notes Knight.
Knight suggest carrying on with this process until all your debt is paid off. He emphasises that you must avoid getting into further debt while you are making your repayments. “Once all your debts are paid, use the full amount you were paying towards debt (as you were paying it anyway) and save that amount per month going forward,” adds Knight.
“Getting out of debt is not an impossible challenge. The solution begins with the correct attitude and a commitment to resolve or improve the situation, undertaken in small steps that will result in dramatic change,” highlights Desai.