Debt can be a budget lifesaver, and help you grow your generational wealth. But, only if you manage it well! Let your debt get out of control and it can derail any plans you have to save, invest and become financially independent.
Did you know that 50% of South Africans said they were running out of money before month end in 2023? Is this you, or are you managing your debt responsibly? Answer these 11 questions to find out!
1. How much debt do you have?
The rand amount, please, for each debt and for all your debts in total. Make a note of it or find out if you don’t know, and keep a check on it once a month to see if your debts are going up, down or staying the same.
2. What are your repayments?
Again, for each debt, how much is the repayment each month, does it change, such as if interest rates change does your repayment amount change, and how long will it take you to repay the debt?
3. Sums that make sense! What percentage of your take-home pay goes towards debts?
This is a quick way to check if you are overindebted. Use your take-home pay (after tax) and your debts to work out the number as a percentage.
If your take home pay is R30 000 and your debt repayments R13 000, you are spending 43% of your take home pay on debt (R13 000 divided by R30 000 x 100). That seems like a lot, and suggestions are that you spend no more than 30-35% of your take-home pay on repaying debts.
But, the numbers are a guide only. The easy way to judge if you have too much debt is to ask whether or not you can make repayments on time, absorb any increases in interest rates, AND whether or not your debt is going down! If those are good you are okay. If not, consider a debt repayment plan to reduce your total debts.
You can read more about how to show your debt who’s boss in this blog.
Top tip: Debt free forever? You can! Take Truth About Money’s Ditching Debt 30-minute free financial education course to help you manage and pay off your debts.
4. Are you making repayments on time, all the time?
Answer yes and you are managing your debt well, as long as you are not using one debt to pay another. That is just recycling debt, and in the long run your debt may actually increase as the interest mounts up.
5. Do you know what to do if you are struggling to make repayments on time?
In many different circumstances repaying debts can become difficult. When it does, you must ask for help! This isn't a failure or poor reflection on your life skills. Asking for help shows that you know when you are in trouble and need some assistance! Which is very responsible debt management!
If you struggle to repay, make sure you know your options for each debt, including whether or not you have a grace period to make up the missed payment, if there are charges for missed or late payments, including bank charges for rejected (bounced) debit orders, when and how letters of warning or demand are issued, how and when you can enter debt review, a process that makes paying off your debts affordable.
6. What interest rate and fees are you charged?
Interest and fees are the cost of debt. You may borrow R10 000, but together with interest and fees end up paying back R14 000! You want to keep interest and fees as low as possible.
Your interest rate (% and rand amount) must be on your statement, as must any fees charged. These amounts should also be explained to you when you take out debt. Interest rates may vary as the official rate of interest (prime) moves up and down. You will know about interest rates moving up from last year!
Top tip: Find out how interest payments affect the amount outstanding, and how you can work the numbers to your advantage! Use 1Life Insurance's payable interest calculator to work out your interest amounts in rands.
7. Can you negotiate a lower interest rate?
Interest rates too high? You may be able to negotiate a lower interest rate with your credit provider, such as a bank. If you have a good credit record, can manage your debts and are not overindebted, your credit provider may be willing to give you a lower interest rate.
It’s always worth asking.
8. Is some of your debt being used to build your wealth?
Debt can grow your wealth, such as when you use a home loan to purchase a home. For most of us, saving enough cash to buy property just isn’t an option, so using a home loan is a good use of credit to build wealth. Pay off a home loan in the time frame, such as 20 years, and you can have an asset you own, can use and leave to your family for future generations. Even a car that you use to generate an income, such as delivering items on weekends or getting to see clients, can be used to grow your wealth. Debt that you use for items such as paying for a holiday by using a credit card can deplete your wealth, so as far as possible avoid these debts.
9. Are all your credit providers registered with the National Credit Regulator?
Registered credit providers have to follow the regulations in the National Credit Act, which ensures your protection. For example, they cannot charge excessive interest rates or offer you credit you cannot afford. Unregistered credit providers can! Unregistered credit providers can also, at any time, harass you and demand repayment, so they should be avoided. The same holds for family and friends. Lending within your family and close friends’ circle can work, but for many it is just a no-go area and breaks relationships.
Check with the National Credit Regulator that your credit provider is registered.
10. Is some of your debt insured?
Credit life insurance is one way you can insure debts, and many debts such as credit cards and personal loans automatically include credit life insurance. If you pass away, or are retrenched (depending on the credit life insurance’s terms and conditions), your credit life insurance may pay off the outstanding amount on a debt.
You can check with your credit provider if you have secured credit, and/or if your credit is insured.
11. Have you checked your credit record this year and do you know your credit score?
Your credit record is your credit history and shows which debts you have, how you repay them or have repaid them, whether or not you pay on time, and if you have any outstanding judgements or have defaulted on a debt or debts. This information is used to compile your credit score. Check your credit record for free once a year, and your credit score each month with services such as ClearScore, Experian and TransUnion.
How did you score?
Pass or fail, we’ve got the tools, courses and services you need to master your debt and manage it responsibly. So go on, be like J Moseri who took a short course from Truth About Money, and you too can learn how to live debt free.