5 habits of those drowning in debt

13 November 2017
PHOTO: Getty/Gallo Images

PHOTO: Getty/Gallo Images

Follow these tips to break bad financial habits.

Not everyone with healthy finances has always been debt-free – many simply made a plan to get out of it. Credit can be beneficial if responsibly used but bad lending habits can quickly trap you in a whirlpool of debt.

We look at the worst habits of people who are in over their heads and how to break them.

 1.  Ignore the big picture

Many people ignore their total debt because they don’t realise what qualifies as debt. Loans, the cellphone you’re paying off, your clothing account, outstanding amounts on your credit card, or an overdraft are all forms of debt. And many people ignore the big picture because the truth scares them.

Debt doesn’t disappear if you ignore it. If you don’t take control of it, it can escalate to a point where you’d take years to pay it off. Large debts are also bad for your credit record – which could even influence your chances of getting a job if an employer doesn’t think you’re a responsible person.

What to do:

·  Request your credit record – you’re entitled to one free credit check a year from credit bureaux (there’s a list on the National Credit Regulator’s website at ncr.org.za). Check your bank statements to see what amounts are deducted monthly. Create a spreadsheet or write down which payments relate to debt. It’ll quickly show you how much total debt you have.

· Take control of your finances by drawing up a budget. It shows how much you spend and how much you earn and will help you keep track of expenses. The golden rule is spending less than you earn.

It’ll be easy to see what expenses you can curb in order to pay off you debt faster, for example luxuries such as retail accounts or subscriptions such as gym or satellite TV. There are nifty smartphone apps to help you budget or go to debt counsellors’ websites, such as debtbusters.co.za/tip/budget-calculator.

2.  Skipping or delaying payments 

Doing this makes it harder to clear your debt because you’ll have to pay a larger amount later (the arrears plus the next month’s payment) to catch up. Late payments or skipping a payment can also mean a higher interest rate on the specific payment – check the fine print of the credit agreement.

That means you’re even more in debt. Even if you’re late with only one payment, it can count against you on your credit record, affecting your creditworthiness. If you have a low credit rating and your record shows your payments are regularly late, it’ll be harder to get a loan in future. Even renting a property can be a problem because if your credit record shows you’re not a prompt payer, your rental application will likely be unsuccessful.

What to do:

·   If you’re able to pay off your debt, Francois Viviers of Capitec suggests you prioritise. Try paying a bit more on the debt with the highest interest rate while still paying the minimum required amounts – the credit provider will inform you what this is – on other debt. The faster you clear certain debts, the more money you’ll have available to clear others. As you faithfully clear your debts, you’ll eventually improve your credit record.

·  If you fall behind or suspect you won’t be able to make payment, speak to the credit provider and negotiate for smaller payments. The repayment period will increase, but the monthly amount will be less. Because of interest you’ll eventually pay more but your situation might improve and you can pay off the debt faster.

·  If you can’t pay the debt and don’t know what to do, contact a debt counsellor (they’re listed on ncr.org.za). They work out a payment plan for you but you’re not allowed to make new debt in that time. This is only an option if your total debt is less than R50 000. There are service fees, so ask how much the process will cost you.

3. Using debt to pay debt

Using your credit card to pay other accounts is called debt recycling. The problem is that the interest rate on your credit card is some of the highest there is, so your monthly payments on it grow while you’re only managing to make the minimum payments on your other accounts.

What to do:

·  Talk to your creditors! As mentioned you might be able to negotiate lower monthly payments. At least you’ll be paying off debt instead of just recycling it. You can also contact the National Debt Mediation Association (ndma.org.za) for help.

·  A financial adviser can analyse your financial situation and create a plan for you to clear your debt.

4. Paying off other people’s debt

Don’t pay off someone else’s debt if you’re unable to meet your own financial responsibilities. Many people have family members whom they feel responsible for helping financially.

What to do:

·  You can only consider helping someone else pay off their debt if you can afford it after: you’ve made your own monthly payments; put a savings amount aside; and seen to your household needs. An honest conversation is the only way – explain that you need to meet your own financial responsibilities first. Be firm, or you might be taken advantage of.

·  Remember that once you’ve helped someone, they’ll continue expecting your help, instead of doing what they can to decrease their debt. They might even get into more debt. Suggest they seek help from a financial adviser or debt counsellor.

·  Don’t even consider it if you have to take out more debt to help someone else.

5.  Trying to keep up with the Joneses

Debt counsellors say people’s aspirations for a more luxury lifestyle is often one of the main reasons for overspending.

What to do:

·  We often don’t realise how much our lifestyle costs but a few basic changes can save you a lot of money. For example there are more affordable ways to spend your leisure time than going to a movie – have a picnic, go for a walk or visit a museum.

·  Don’t buy anything just because other people have it – especially if you can’t afford it. Ask yourself if it’s really going to add any value to your and your family’s life.

·  Matthys Potgieter from DebtSafe suggests daily reminders on your phone to learn these better financial habits.

·  Ask a good friend to be your accountability partner. You can remind and encourage each other not to buy unnecessary things.

Read more on:    money clinic

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