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How to use credit effectively

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Cape Town - While it is true that millions of South Africans are drowning in debt, there are also millions who are managing to use credit effectively, according to Hein du Plessis, managing director at Debtsafe.

According to the latest SA Reserve Bank Quarterly, the cost of servicing the household sector debt burden expressed as a percentage of disposable income moved broadly sideways since early-2013 after actually showing a declining trend from 2009 to 2012.

"What does it take to live within your means? Why do some households manage their finances effectively while other people wonder where their money went long before their next pay check?" asked Du Plessis.

He says there are three key reasons as to why some households manage their money more effectively.

“Some households are better at living within their means, because they have a frugal mind-set, they earn enough to support themselves and they are simply better at cutting back on unnecessary expenses and knowing how to save and budget effectively.”

He said that, while it is important to have enough income to support a household, it’s also critical to have the right mind-set and skills.
    
“South Africans are notoriously bad at saving and are also big fans of retail accounts – which together can present a significant problem in the long term," he said.

"Taking on credit on a small scale may not seem like a major financial responsibility, but it all adds up, which is how many consumers find themselves in the situation where their debt repayments are more than half of their income.”

To avoid this happening, he said consumers need to get into a mindset where they don’t take on debt unless they absolutely have to.

"South Africans are also big fans of microloans and while these might not seem like a big threat on their own, every repayment towards a loan means less money towards your living expenses and savings," he said.

“By saving or investing, you are instead paying yourself, because your money earns interest.

People who manage their finances well know this: They will rather save for something than apply for a loan and make a creditor rich.

Having a savings fund can also be a great safety net when you run into financial trouble or an emergency cost appears, such as car repairs, said Du Plessis.

People who are used to saving tend to service their debt much more effectively when they do take out loans.

“Instead of saving, they put that money towards servicing their debt and don’t feel the tightening of their budget like those who are more inclined to live beyond their means,” he said.

“It’s fine to spoil yourself once in a while, but people must not let their lifestyle dictate their quality of life. Trying to buy a better lifestyle, means you are more likely to find yourself in a dire financial situation.”

- Fin24

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