You promised yourself it wouldn’t happen – and despite your best intentions you’ve gone into a new month with your wallet empty and your credit card and overdraft maxed out. Now what? Here’s some handy advice on how to clear your debt quickly while juggling all your other financial obligations.
Debt incurred during the holidays should be paid off as soon as possible. If there’s no corresponding increase in your income, you need to look at where you can curb expenses. Avoid spending money on things you can do without, such as buying takeaway food rather than packing lunch for work or going out to a movie rather than staying home and watching TV.
DRUM spoke to Carla Oberholzer, a debt counsellor with DebtSafe who advised that it's important that individuals be more proactive about their finances this year. Draw up a monthly budget and keep track – whether on paper, a computer or phone app – of your income and expenses. Oberholzer suggested the following ways to help settle your new debt.
Your action plan for zapping debt
The snowball method
Pay off your debt from the smallest amount to the largest. For example, start by paying off a R600 clothing account. Once that’s settled, pay off the second- smallest amount, and so on.
The glacier method
You start by paying off the debt with the highest interest rate, such as your credit card. This payment method takes longer than the snowball method because you’re not necessarily paying off the smallest amount. But once the expensive debt has been squared away, you’ll have more at your disposal to clear your other debts.
This is when you take out a new loan to settle your existing debts in one go. Then you pay off the consolidated loan. Though this simplifies the debt-repayment process, this option is only worth it if the interest rate on the consolidation loan is less than the interest rate on your existing debts.
Speak to a debt counsellor if you’re struggling to make your monthly payments. A debt counsellor may offer free advice without you having to go into debt counselling, Oberholzer says. Debt counsellors are regulated by the National Credit Regulator. If you do go into debt counselling, you’re not allowed to incur new debt and you have to pay a counselling fee. But it’ll help you get to grips with serious debt while protecting your assets.
If you must incur new debt now
First work out how much the new debt is going to cost you. Ask what the interest rate is, how much the fees are, and how long the repayment period is. Banks’ online calculators can help you determine how much the monthly repayment will be and how much you’ll end up paying in total in the long run.
- Credit card
The advantage of using your credit card is that it offers interest-free periods – usually 55 days. This can work to tide you over but only if you pay the full outstanding balance within the 55-day period. This interest-free period is generally only applicable for over-the-counter purchases. Buying petrol, withdrawing cash, or transferring cash from your credit account usually immediately attracts interest. The downside of credit cards is that the interest is high. The National Credit Act stipulates that the maximum interest rate on a credit account is calculated as follows: the repo rate (now 3,75%) + 14% = 177,5%.
Because your salary or income is paid into this account, it represents a lower risk to the bank. That’s why your interest rate and fees will generally be a little lower on an overdraft account than on a credit card. But this depends on your credit profile. On the downside, it’s still expensive debt and you don’t have any interest-free days. That’s why it’s a bad idea to incur long-term debt in this way. Rather use this as a solution to a short-term cash-flow problems.
3. Home loan
Homeowners with an access bond or flexi bond may withdraw from it if and when they need to. Alternatively, you can apply to increase your mortgage loan. The benefit of borrowing from your home loan is that you won’t get a lower interest rate anywhere else. But watch out, if you borrow too much, you’ll be paying off the loan for longer, which means you end up paying much more for your home.
4. Personal loans
These are relatively easy to come by from a licensed credit provider. They’re a good option if you’re only going to use the money to tide you over and know you’ll soon settle the debt in full. The interest rate is the same as on a credit card, plus there’s no interest-free period – so it’s expensive debt.
Find a debt counsellor or credit bureau on the National Credit Regulator’s website: ncr.org.za. Find an accredited financial adviser: fpi.co.za or fia.org.za. For general financial tips, helpful information, and calculators: fscaconsumered.co.za.