Credit card debt is a major challenge for the Absa/City Press Money Makeover contestants who’ve worked with their individual advisers to find ways to settle their debt. However, the only guarantee of long-term success is to stop using credit cards, unless they’re paid in full at the end of each month. Personal finance expert Maya Fisher-French shares their stories.
Finding extra cash in the budget
By making some basic budget adjustments, TV producer Nono has reduced her credit card debt from R6 500 to R1 500 in just three months. “You must understand it’s not that I suddenly had extra money, it was just using the money I already had in a better way!”
Construction entrepreneur Bellah used a large payment from a client to settle her credit card debt, rather than going on a spending spree which she would've done in the past.
Consolidating credit card debt into a personal loan
Government communications specialist Mishack could only afford to repay R3 300 a month. After analysing his payments, he discovered that more than half of the monthly instalment was going towards servicing interest.
Absa adviser Johan Frouws recommended a personal loan to settle the credit card. A personal loan can provide a lower interest rate and a set date that the debt will be settled. By increasing the repayments to R4 000, his debt will be settled within three years.
In order to consolidate debt, you need to have a reasonable credit score, so this is something you should do before you start to default.
Cash in an investment
Consultant Peter relied on his credit card to meet the shortfall in monthly expenses since no longer earning his corporate salary. As he was unable to make any further budget cuts to settle his card, Absa adviser Leighanne Decker recommended Peter cash in an investment to pay off a large portion of credit card debt and to kick-start an emergency fund.
Cashing in an investment should be a last resort. This is only an option for Peter as the significant cut in his salary left the family short each month despite severe budget cuts.
Peter will have to postpone retirement. He must ensure he doesn’t go back into debt and should start investing as soon as possible.
Using your mortgage to consolidate
Executive assistant Catherien’s husband, Jan, built up significant credit card debt when a client defaulted on payment and he’s unable to contribute towards the household budget.
A business strategy is being put in place to ensure he doesn’t rely on credit cards for business cash flow, however, they’ll have to use funds from their mortgage to settle the debt.
Once their finances are back on track, they’ll increase the mortgage payments to ensure the card debt is settled as soon as possible and not over the 20-year home-loan period. While it may be tempting to dip into your mortgage, you need to be aware of the long-term consequences.
A R20 000 credit card debt paid off over 20 years would cost you R26 000 in interest. You must increase your bond repayments so the debt is settled over a shorter period.
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