How to make debt work for you

By Mieke Vlok
23 July 2017

Avoid debt as much you can. It’s good advice. But what should you do if you simply have to borrow money to get by? How can you do it responsibly?

Avoid debt as much you can. It’s good advice.

Debt can accumulate quickly, silently creeping up on you until it becomes a monster that keeps you up at night. In today’s struggling economy especially, debt is best avoided like the plague, experts warn.

But what if you simply can’t avoid it? Food seems to cost more every week, the petrol price has just gone up and your annual salary increase hasn’t kept up with inflation for years.

There was a time when your income could get you through the month but lately, it’s often spent well before your next payday. So what should you do if you simply have to borrow money to get by? How can you do it responsibly?

“If you have no other choice, the debt option with the lowest interest rate and service fees paid back in the shortest possible time is probably the best choice, but make sure it is with an accredited financial group,” says Letitia Watson, who writes YOU’s weekly Your Money column.

If you stay informed about the smartest credit options you can solve cash-flow problems without getting caught in a debt trap, so first get advice from your bank, a financial adviser or a debt specialist before you commit yourself, she adds.

Credit with a low-interest rate might seem attractive but it becomes expensive if you pay back the debt over a long time, says Wikus Olivier, a debt expert with Debt Safe in Pretoria. For example, a loan at eight percent interest might seem a better option than one at 10 percent but you’d gain nothing if you allowed the interest to accumulate instead of paying it off quickly.

Here’s a look at the most common types of debt and tips on how to handle them.

Credit card

This type of debt is one of the most expensive out there and interest can be about 21 percent currently, Watson says.

If you do use a credit card you should pay the amount you owe in full each month to avoid interest, so give yourself a limit so you don’t have to spend too much of next month’s salary paying it off.

But a credit card does help you build a credit record, Olivier says. The interest rate you get depends on how loyally you pay back your debt, adds Israel Skosana, an executive for consumer cards at Standard Bank.

Credit cards also have interest-free periods – usually around 55 days provided you pay the minimum amount every month – and you can often earn more loyalty points with a credit card than your debit card, says Jan Moganwa, head of customer solutions for Absa retail and business banking. Loyalty points can be exchanged for money or used to pay for fuel and airline tickets among others things. “Before you join, make sure that membership of the loyalty scheme doesn’t cost more than the benefits,” Watson cautions.

“Don’t use your credit card for expenses such as study loans and medical costs because those debts are paid off over time and there are better solutions designed specifically for that,” Moganwa adds.

Rather take out a study loan as the interest rate is likely to be better and discuss a medical crisis with your medical aid scheme. If you don’t belong to one, speak to a financial adviser to see if there’s a more sound financial solution, such as a personal loan tailored to your needs.

“Also remember that certain types of transactions attract interest from the day they’re made, such as cash withdrawals, forex and casino chips,” Skosana says. It’s best not to use your credit card for any of these.

Although a credit card could be a great help if you’re able to pay it off in full every month, more often its expensive debt, Watson says. Other possible benefits include travel insurance, special tariffs for petrol cards and low or no transaction fees.

If you pay money into your credit card at the beginning of the month and use it as you would a debit card, you could even earn interest. But don’t expect to make much as these interest rates are low.

Overdraft this credit option is linked to your current account, which is usually where your salary and any other earnings are deposited. An overdraft facility allows you to go into the red and is remedied when your salary is deposited, Moganwa explains. “The overdrawn amount can be as small as R250 or as big as R250 000,” he says.

The requirements are similar to those of a credit card, Watson adds. The amount of credit you can access depends on your credit profile, income and ability to repay the debt.

Because your income is paid into this account an overdraft carries less risk for the bank and your interest rate and fees are often lower than with a credit card –depending on how healthy your credit profile is.

The interest rates on overdraft accounts can be lower than those on credit cards but most credit cards offer some interest-free days whereas interest is levied the moment you use an overdraft.

Your credit card makes you less vulnerable as you can pay a minimum amount back, while your overdraft is settled in full every month when your salary is paid into your account, says Zuné Coetzer, a debt counselor from Bloemfontein.

With an overdraft, you shouldn’t go into the red as you please because if you use too much of your income to make up the shortfall you’ll be short again at the end of the month and will simply go into a cycle of debt.

“Don’t ever use an overdraft for long term debt,” Watson says. “See it as an option only for a cash-flow problem.”

Home loan The interest rate on your home loan is among the lowest you can get. Because your bank has the property as security, its risk is much lower, which means you get a lower interest rate, Moganwa explains. Remember your credit profile affects your interest rate.

Make an effort to pay as much extra money as you can into your home loan because then you can borrow from it instead of using more expensive options such as a personal loan, Olivier says.

Ask about this option when you do the paperwork for your home loan, Moganwa says.

Being able to borrow from your home loan is useful for big purchases such as a car but it’s not worth it to use the facility for short-term debt and luxury items such as a new TV, Coetzer says.

Also remember, borrowing too much from your home loan means you reverse any progress you’ve made reducing your bond and you can end up paying off your house over a longer period, which will cost you more, Olivier says.

You can borrow money from your home loan for renovations, which increase the house’s value.

Store cards

Store cards

Cards for clothing retailers or wholesalers could work better than your credit card in terms of debt management as most offer up to six months interest-free, Olivier says.

But you must remember the interest-free period is conditional on payment of the minimum amount owed every month, he adds. Also, once the interest-free period expires the interest rate is high, Watson warns.

It can be just as high as for a credit card, so make sure you know how long you have to pay back your debt interest-free – and do it within that time. Remember the interest-free period starts the moment you buy an item so if you use the card on several dates in the month you’ll have various times when the interest kicks in.

Administration fees can also make the option more expensive, Coetzer says.

Personal loans

The interest rate on personal loans is high because you’re not putting up an asset such as property as security, Moganwa says. These loans include instant loans at ATMs, payday loans, loans from private financiers and your bank’s personal loans. Depending on the repo rate, interest rates can be as high as 28 percent currently, Watson says. “Often the interest rates are so high that people have to borrow again the next month because they can’t keep up with the payments,” Olivier says. “It can be effective if you have a plan to get the money from somewhere during the following month and you’re using the loan only as bridging finance.” For example, if you need to borrow R1 000 this month because your child needs new school clothes but know you’ll be getting in an extra R1 000 next month from selling old furniture, it could be sensible to take out a personal loan.

Borrowing from friends and family

This is best avoided as it can cause problems in family relationships. If you do make such a loan, it’s important to approach it like a business transaction, Olivier says.

“Draw up a written agreement and decide on an interest rate and the payback period. It’s an uncomfortable conversation but essential.”

Suggest paying back the money at a modest interest rate because it shows you’re serious and committed. Make sure you understand the contract before signing it and ask a legal expert to review it, Watson says.

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