How to effectively manage your debt

One of the problems with debt management is that most of us don’t know about potential solutions until we really need them. Much of our understanding about debt comes from word of mouth. So, you don’t hear about debt consolidation until you are already deep into debt.

This, combined with a desire to solve financial problems without outside help, can lead to severe procrastination. You keep making payments without making any real progress because you don’t know what else to do.

However, allowing a debt problem to linger usually only makes it worse. It also gives you time to damage your credit score. More debt and lower credit will make it even harder to pay off the debt. So, you can’t let fear, intimidation or a desire to fix things on your own delay your plans for debt relief.

The 2017 Old Mutual Savings & Investment Monitor indicates that on average working metropolitan South Africans are allocating 16% of their monthly income to paying back debt. “This is significantly high. The fact that this number has remained consistent over the past six years is concerning as it demonstrates that we are in fact trapped in a recurring cycle of debt and not properly managing our money,” explains Shirley Smith, Old Mutual Finance Chief Operating Officer.

“Incurring a huge amount of debt is an easy trap to fall into, and it plays havoc with your financial wellbeing. People need to understand that debt needs to be managed and brought under control. Borrowing from Peter to pay Paul is not a smart way to go about managing your finances,” Smith says.

“With consumer inflation seeing a year-on-year increase of 4,6% in July 2017, according to Statistics South Africa, South African households are clearly feeling the pinch, causing many of them to resort to pay-day loans at high-interest rates.”

“Consumers need to urgently do a reconciliation of all their debt owed on a monthly basis and consider - solutions to manage debt more proactively. For example, -a debt consolidation loan is - a useful tool– that can help customers managed debt and even -free up some money to start saving for future financial wellbeing goals, like retirement,” she says.

It is important to understand that not all debt is bad. Some debts make good financial sense.

“Essential long-term debt, like a home, car or student loan, is - acceptable when effectively managed.

The problem comes when you accumulate an unmanageable amount of debt on a regular basis. It is essential that you avoid or reduce expensive short-term debt, such as credit cards or store accounts,” explains Smith.

How to effectively manage your debt:

- Make your monthly debt repayments on time. Even a payment that is only 24 hours late can be bad for your credit rating.

- Always pay at least the minimum instalment required.

- If possible, pay more than the minimum payment on accounts to further improve your credit standing.

- Pay your most ‘expensive’ debts off first; these are usually the ones with the highest interest rates such as clothing and furniture accounts.

- Close accounts not in use. Credit providers assess the full facility of the credit agreements on record, even if they are not being used.

- Don’t ignore a letter of demand or any communication from your creditors. Always be proactive and take appropriate action by contacting your creditor to discuss a repayment plan if you are not able to meet your obligations.

- If you simply cannot make payments on all your outstanding accounts, speak to a debt counsellor, who will on your behalf negotiate revised terms on settling your outstanding debt.

“By taking these simple steps to reduce your debt and avoiding incurring additional unnecessary debt, you will spend less on interest and be able to save or invest more money towards goals such as a comfortable retirement. Use Financial Planning Week as an opportunity to get your debt under control,” concludes Smith.

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