Temptation led me astray

2012-07-28 11:15

This month we received emails from several readers who were all struggling to pay off their debt.

One of the main reasons they took credit in the first place was to create a good credit record.

The problem is that a lack of discipline turned it into a negative record.

You don’t always have to take out a card to create a credit record and if you are in debt, you need to have a plan

Beth writes:

I’ve always been a saver and have hated debt with a passion. I applied for a store card to create a good credit rating.

It soon became clear that I am not a disciplined spender so I paid off the card and closed the account.

This year I bought a car, and used my savings to pay the deposit. This left my money market piggy bank running on empty.

As a safety net in emergencies, I increased my Discovery credit card limit which had previously been kept at R1 to retain the loyalty benefits without the temptation of debt.

Desire overtook reason, however, and I now have to pay off R8 000 in credit card debt.

I still save R200 every month to keep the savings habit going and pay every extra rand I get towards the card; but with car expenses nearing R4 000 on a R7 000 net salary it’s become a burden.

Do you have advice on how one can get rid of all this debt because my whole budget is tied up with life cover, cellphone contracts, family responsibility and the like?

Maya replies:
Your story is a great example about the risks of easy credit. If you are the type of person who is easily tempted to spend then it is best to avoid it altogether.

I always compare this to my biscuit weakness. I love biscuits and if I have a packet of them in the house I eat them all in one day.

The only way to keep my waistline intact is not to have biscuits in the house. I keep my biscuit addiction for a special treat when I go out for a cup of coffee.

For many people, easy access to credit is like my packet of biscuits – and just like putting on and then trying to lose weight, it takes a lot longer to pay off the debt than to accumulate it.

Now that you are on the road to recovery, the first thing to do is get rid of the temptation and hand your card over to a trusted friend (but not with the pin).

Then sit down and work out a plan to pay off the card.

» I like the fact that you are continuing to save R200 – even if you are paying off debt you need to build a safety net as well so that you don’t have to use the card again in an emergency.

» Work out how much you can reasonably pay into the card each month and work out how long before your card is paid off.

That will give you a tangible goal to keep you motivated. You may even want to keep track on a wall calendar and cross off each day you get closer to your goal.

» Write down your monthly budget and see if there is anywhere you can cut back further. It may take some sacrifices but if you have a time frame in place you know when the pain will be over.

» See if you can lift-share to cut back on fuel costs and shop around for cheaper car insurance if you can.

» Once your card is paid off, start working on reducing that car debt.

Do you need a store card to build a credit record?

Bonang writes:
I am currently a student and have part-time jobs which pay about R2 000 a month. I want to build my credit record and open a Woolworths account.

How exactly does it work with regards to payments when I purchase on credit as I believe it does not work like Foschini group’s six-month revolving credit account, where interest will only be levied after six months if the account is not settled.

Maya replies:
You do not necessarily need a store card or credit card to build up a credit record for the bank.

Under the National Credit Act, a bank may not decline credit just because you cannot show that you have a credit facility elsewhere.

Alastair Bye of FNB Smart Loans says that if a customer already has a bank account with debit orders and they have managed that account well – in other words with no bounced debit orders – then they will have a good risk rating at their bank.

“This is because that bank will assess the behaviour on that cheque account, so in that instance having additional credit products may help to improve their risk assessment – but only to a much smaller degree,”
says Bye.

He adds, however, that it is beneficial to have a good store credit account in a situation where you apply at a bank where you have no savings, transactional or credit products at all.

Having a “strong” bureau record with credit products is then beneficial to a customer in terms of the potential offering they will receive.

The bottom line is rather start with a well-managed debit order on a savings account than open a store card.

If you do take out a clothing store card, then it is better to opt for the six month
interest-free option.

The 12-month repayment plans do charge interest.

Also, be very careful that you do not sign up for additional services, like loyalty magazines, that end up costing you money.

Make sure you meet your payments every month so you do not incur a negative credit record or penalty interest.

The Woolworths card is a credit card, exactly the same as you would receive from your bank and you pay a yearly fee for the card.

If you pay it in full at the end of each month, there would be no interest payable. You can do this by having a debit order that pays it off in full.

However, if you just pay the minimum amount each month, you will incur interest.

You should really never, ever pay only the minimum amount. If you can’t afford to pay it off in one month then you can’t afford it – end of story.

How much will my money be worth?

Willem writes:
How much would a R500 monthly investment in Satrix be worth after five years?

Maya replies:
As Satrix is an investment in shares on the JSE, there is no guarantee as to the return.

Historically, the market has had returns of about 15% a year on average but fund managers are warning that this will not be repeated as the investment environment has become more challenging.

To be realistic, you should consider returns of about 10% a year.

Based on this assumption, if you invested R500 a month for five years (a total of R30 000) you would have a final value of about R40 000.

But remember this is not guaranteed – it could be more or it could be less.

The returns are also not linear, which means there may be one year where your return is 5% and the next year it is 20% – the figures are averages over the total period.

However, a debit order invested for five years in a market-related investment such as Satrix or a unit trust is expected to deliver a return above cash and, more importantly, above inflation.

Preparing to buy your first home

Nikiwe writes:

I am a young woman who’s just been employed and am preparing to buy my first home.

I would like to get advice on what I should invest in.

Maya replies:
A good strategy is to save the difference between your current rent and what it will cost you each month as a homeowner – this would include your bond repayments, insurance, rates and levies.

This strategy helps you to adapt to living off a smaller budget once you have to service a bond, and it also helps in building up a deposit for your first home.

If you are saving over a year or two, then it is best to save in a high-interest bank account or money market fund.

Capitec has a great fixed-deposit product that pays you a fixed-deposit rate but you can add to it monthly.

If you have a longer time horizon of five years for example, then you should consider a balance

d unit trust that can provide a return in excess of inflation.

When buying a house, immediately increase your bond repayments by 10% each month.

This will not only pay off your mortgage faster, but will provide a cushion against rising rates.

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