Down with debt! | Fin24
 
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Down with debt!

Sep 21 2017 12:02
Sylvia Walker

Sylvia Walker’s latest book is published by Penguin Random House.

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We have all known people who have managed to get themselves knee-deep in debt. I have often wondered how some people afford their lifestyles. 

A lot of them are built on debt, of course; if it’s not managed properly, you can drown in it. This was brought home to me rather sadly by a colleague I had a few years back. He always used to joke and say, ‘I have a great bank manager.

If I need money, I just go and speak to him.’ I thought this a strange perspective, which we never discussed much. But, after about a year, he lost his home.

One can only run so fast on the debt treadmill before it overwhelms you. So, we need to make sure that we get off it before it’s too late. 

You have to grab the situation by the horns and start digging yourself out of debt, while implementing actions that will prevent you from going into more debt in future. 

If your situation is dire and you can no longer service your debts, it’s time to come clean and face your creditors. Be honest and offer to pay back a smaller amount each month until the debt is redeemed. 

You can formalise this through the debt review process: you are declared over-indebted, and a debt counsellor negotiates a restructured payment plan with your creditors and obtains a court order confirming the new repayment plan.

Another option is debt consolidation. You can do this through a debt consolidation loan, or by increasing your home loan.

This may work wonders for improving your monthly cash flow – but a word of caution: Your debts are all repayable over a certain term, so be careful not to consolidate them and then pay them off over a longer term. 

This will cost you more money at the end of the day. For example, suppose you have credit card and store card debt that you cannot repay. These debts were probably payable over 12 or 24 months. 

You could increase your home loan by this amount, settle your short-term debts and pay an increased home loan instalment. The problem is that you still have, say, 15 years’ worth of home loan to repay. 

Don’t exchange short-term debt for long-term debt. Rather pay off the new loan amount over the same period – 12 or 24 months.

These are drastic options that you should use only as a last resort. If you want to tackle your debt more subtly, here are some simple steps that you can follow:

Make a list of all your debt, noting the outstanding balance, monthly repayment amount and interest rate. This will give you the big picture and help you to make decisions about how to tackle it.

Scrutinise each account to see exactly what you are being charged for every month. What other costs are being added? A common addition is credit life insurance, which is very expensive and covers you for death, disability and retrenchment, depending on the structure of the cover. 

It settles your account in full if you die, or are disabled or retrenched. If you have sufficient life cover elsewhere, contact the creditor and ask them whether the credit life insurance can be removed. 

Be aware, too, that the cover may not apply to you.

In 2016, Lewis Stores was found to be in breach of the National Credit Act for selling loss of employment and disability cover to pensioners and unemployed people as part of credit insurance. 

Lewis Stores was ordered to refund customers the premiums that they had been charged. Clothing retailers often have club membership, for which you may also be paying.

Benefits of these clubs may include a magazine that you don’t need, and special discounts on purchases, meaning that you need to spend more money in order to save money! 

Remove it, and put that extra R40 or R50 a month towards paying off your account. Every little bit helps! 

It is also interesting to note that in May 2017, the National Consumer Tribunal ruled that the club fees charged by Edcon were unlawful and contravened the National Credit Act. 

At the time of writing, Edcon was appealing the ruling, as it has far-reaching implications. As consumers, we all need to make sure that we grant permission for any club membership or other additions to our accounts, so that we don’t pay for something that we have not authorised.

Contact your credit provider to see whether it can offer you a lower interest rate. It’s not always wise to have different financial products with different companies, as they often offer better rates if you keep everything under one roof. 

For example, you may get a better rate if your home loan and credit card are with the same bank. Do your homework on this.

Next, draw up a plan for eradicating your debt. List your debts from smallest to largest, and pay them off as usual, but stop buying on the first account that you settle. 

Cut up the card and close the account so that you are not tempted to buy again. 

Someone once told me about her aunt who would pay off an account and, once it had a zero balance, start spending on it again. Retailers are there to make money; a zero balance is not something they value. 

If your account is active but has a zero balance, they will send you all kinds of correspondence and discount coupons and gift vouchers to tempt you to spend again. 

Rather close the account. When you have completely settled one debt, move on to the next one on your list. Pay the instalment plus whatever you were paying on the first debt. 

Once this debt has been settled, move to the third one, following the same pattern. In this way, you will eliminate your debts methodically and bring your money under control.

This is something referred to as the ‘snowball’ method of reducing debt, as you gain momentum as each debt is paid off. Remember, this process will not happen overnight – it probably took you months or years to get into debt, so getting out of it will also take time. 

Be patient and you will reap the rewards.

Reward yourself for paying off each debt. Buy or do something that you value – but use cash! You will feel motivated and inspired when you start seeing your debt reduce.

Use windfalls such as your annual bonus (if you receive one) to make a dent in your debt. Do not use all this money for debt, though – keep some aside for spoiling yourself, or you may be tempted to go into debt again.

It’s a wonderful feeling to be flush with money, but use it wisely, so that it is not just all consumed and lost in memory.

Along with an active plan to reduce your debt, you may also want to look at your spending patterns and consider some innovative ways to boost your income.We have all known people who have managed to get themselves knee-deep in debt. I have often wondered how some people afford their lifestyles. 

A lot of them are built on debt, of course; if it’s not managed properly, you can drown in it. This was brought home to me rather sadly by a colleague I had a few years back.

He always used to joke and say, ‘I have a great bank manager. If I need money, I just go and speak to him.’ I thought this a strange perspective, which we never discussed much. But, after about a year, he lost his home.

One can only run so fast on the debt treadmill before it overwhelms you. So, we need to make sure that we get off it before it’s too late. 

You have to grab the situation by the horns and start digging yourself out of debt, while implementing actions that will prevent you from going into more debt in future. 

If your situation is dire and you can no longer service your debts, it’s time to come clean and face your creditors. Be honest and offer to pay back a smaller amount each month until the debt is redeemed. 

You can formalise this through the debt review process: you are declared over-indebted, and a debt counsellor negotiates a restructured payment plan with your creditors and obtains a court order confirming the new repayment plan.

Another option is debt consolidation. You can do this through a debt consolidation loan, or by increasing your home loan.

This may work wonders for improving your monthly cash flow – but a word of caution: Your debts are all repayable over a certain term, so be careful not to consolidate them and then pay them off over a longer term. 

This will cost you more money at the end of the day. For example, suppose you have credit card and store card debt that you cannot repay. These debts were probably payable over 12 or 24 months. 

You could increase your home loan by this amount, settle your short-term debts and pay an increased home loan instalment. The problem is that you still have, say, 15 years’ worth of home loan to repay. 

Don’t exchange short-term debt for long-term debt. Rather pay off the new loan amount over the same period – 12 or 24 months.

These are drastic options that you should use only as a last resort. If you want to tackle your debt more subtly, here are some simple steps that you can follow:

Make a list of all your debt, noting the outstanding balance, monthly repayment amount and interest rate. This will give you the big picture and help you to make decisions about how to tackle it.

Scrutinise each account to see exactly what you are being charged for every month. What other costs are being added? A common addition is credit life insurance, which is very expensive and covers you for death, disability and retrenchment, depending on the structure of the cover. 

It settles your account in full if you die, or are disabled or retrenched. If you have sufficient life cover elsewhere, contact the creditor and ask them whether the credit life insurance can be removed. 

Be aware, too, that the cover may not apply to you.

In 2016, Lewis Stores was found to be in breach of the National Credit Act for selling loss of employment and disability cover to pensioners and unemployed people as part of credit insurance. 

Lewis Stores was ordered to refund customers the premiums that they had been charged. Clothing retailers often have club membership, for which you may also be paying.

Benefits of these clubs may include a magazine that you don’t need, and special discounts on purchases, meaning that you need to spend more money in order to save money! 

Remove it, and put that extra R40 or R50 a month towards paying off your account. Every little bit helps! 

It is also interesting to note that in May 2017, the National Consumer Tribunal ruled that the club fees charged by Edcon were unlawful and contravened the National Credit Act. 

At the time of writing, Edcon was appealing the ruling, as it has far-reaching implications. As consumers, we all need to make sure that we grant permission for any club membership or other additions to our accounts, so that we don’t pay for something that we have not authorised.

Contact your credit provider to see whether it can offer you a lower interest rate. It’s not always wise to have different financial products with different companies, as they often offer better rates if you keep everything under one roof. 

For example, you may get a better rate if your home loan and credit card are with the same bank. Do your homework on this.

Next, draw up a plan for eradicating your debt. List your debts from smallest to largest, and pay them off as usual, but stop buying on the first account that you settle. 

Cut up the card and close the account so that you are not tempted to buy again. 

Someone once told me about her aunt who would pay off an account and, once it had a zero balance, start spending on it again. Retailers are there to make money; a zero balance is not something they value. 

If your account is active but has a zero balance, they will send you all kinds of correspondence and discount coupons and gift vouchers to tempt you to spend again. 

Rather close the account. When you have completely settled one debt, move on to the next one on your list. Pay the instalment plus whatever you were paying on the first debt. 

Once this debt has been settled, move to the third one, following the same pattern. In this way, you will eliminate your debts methodically and bring your money under control.

This is something referred to as the ‘snowball’ method of reducing debt, as you gain momentum as each debt is paid off. Remember, this process will not happen overnight – it probably took you months or years to get into debt, so getting out of it will also take time. 

Be patient and you will reap the rewards.

Reward yourself for paying off each debt. Buy or do something that you value – but use cash! You will feel motivated and inspired when you start seeing your debt reduce.

Use windfalls such as your annual bonus (if you receive one) to make a dent in your debt. Do not use all this money for debt, though – keep some aside for spoiling yourself, or you may be tempted to go into debt again.

It’s a wonderful feeling to be flush with money, but use it wisely, so that it is not just all consumed and lost in memory.

Along with an active plan to reduce your debt, you may also want to look at your spending patterns and consider some innovative ways to boost your income.

This is an excerpt from Smartwoman: How to Gain Financial Independence and Create Wealth by Sylvia Walker.

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