Need Debt Management Tips? Take a Look

When you are focusing on your financial goals, you need to look at trimming and eventually eliminating your debt. Having financial discipline and motivation to get out of debt will help you to feel financially secure and you will be in control of your money.

debt free

Take a look at these debt management tips that will help you to start your journey to a debt free life.

Did You Know Bad Debt Negatively Impacts You?

When you owe more money then it becomes less likely that you can repay your debt. You can easily find yourself trapped in a debt cycle when you borrow too much and it becomes increasingly harder to get out of it.

Your credit score becomes negatively impacted when you start to skip payments or when you pay late, which will make it harder for you to get approved for larger items like a home loan.

Your credit score is calculated via a formula that looks at your ability to pay your bills, the amount of debt that you carry and how it compares to other borrowers. The single number that appears on your credit report shows your ability to manage existing credit and the higher your score then the better.

So How Does Your Credit Score Affect You?

When you have a low credit score then it means that you will find it harder to gain access to various loan facilities like vehicle finance, overdrafts, home loans and credit facilities because you are seen as a risky borrower.

If you are applying for a job, a company may run a credit check on you and if they see you have a negative credit score then it could affect your job opportunities.

If you own a business, then you may struggle to secure a business loan or better terms if you have a poor personal credit score.

credit score

Why Are People Over-Indebted

South Africans are big borrowers and credit extensions are growing faster than job creation, but there are a number of other reasons as to why people are failing to manage debt responsibly.

The main reasons are:

  • Retrenchment, loss of employment or closure of business
  • Lenders giving credit to those that are not able to pay it back
  • Impulse spending
  • Living beyond your means

Is There Good Debt?

Good debt is money that you borrow in order to make more money. This type of debt will build wealth over the long term, so that you are better off then you were.

It is then more like an investment that will grow in value or will generate long-term income like a student loan that will help you to earn a better income in the long run or a home loan that will give you ownership of a property that is likely to increase in value.

Good debt is then when you buy high value items like a home and where credit makes it easier for you to afford these. When you have continuously paid creditors on time then you will be more likely to be approved for these type of loans.

In order to maintain and build a good credit score, you will need to manage your accounts and pay the full instalment on time, every month.

Manage Your Debt with these Tips

Know What You Owe

If you are struggling with debt, then the first thing that you need to do is organise your finances. Determine the exact amount you owe and who you owe money to. Keep a list of all your debts and take note of the creditors, monthly repayments, the total that you owe and when payments are due and keep this list up to date.

Having everything down and easily accessed can help you to know where you stand. You will also find it easier to keep on top of your debt obligations.

Have a Budget in Place

You will need to have a budget in place to see what money is coming in and what is being used for expenses. This will give you an idea of what you have every month and how much debt you can afford to repay each month.

budget

What to Pay Off First

You will need to prioritise your debt list, but which one should you pay off first? Some debts that are more expensive than others, so you should target debts that carry a high interest rate first and the one that is costing you the most. Your credit card is usually the worst one so paying this off first can help you to save money in the long run.

Pay What You Can

Paying a little extra then what you owe every month should be the goal as you will pay off your debt faster, but it is not always possible. You will need to pay at least the minimum monthly payment to make sure that your debt doesn’t grow. It is a good idea to pay extra on amounts that have high interest rates first.

When you miss a payment it becomes difficult to catch up and if you fail to pay for several months in a row then your account may end up in default. Making the minimum payment will stop your debt from growing and will make sure your account remains in good standing. If extra cash is freed up later on then you can always pay more. You can stay on track by setting up monthly debit orders.

Stop the Impulse Spending

You should set aside a monthly amount that you can afford to buy some luxuries. When you create a small splurge fund in your budget that is used for indulgences it will allow you to spend money on things that you really want but you will need to stick to the amount that you have set aside.

If you are susceptible to impulse spending, then you need to curb your habit. Before you buy anything that is not part of your budget, you should stop and take a day or two to think about the purchase. More often then not you will realise that you don’t really need the item.

debt consolidation

You Can Use Debt Consolidation

With debt consolidation, you are effectively taking out a new loan to pay off a number of smaller debts. Your multiple debts are combined into one, larger debt, but it usually has a more favourable pay off term like a lower interest rate and lower monthly repayments.

This is an effective way to pay all your creditors at once and you will then only need to worry about one monthly instalment. Debt consolidation is ideal if you are over-indebted and have multiple or high loan repayments. However, you will need to be disciplined with money to go down this route so that you don’t end up spending your debt consolidation loan on other items instead of your debt, because this will just see you in further debt.

Give Yourself a Pat on the Back

You should set yourself goals and when you hit a debt reduction milestone then you should reward yourself within your means of course. This will help to keep you motivated. Set a reasonable goal and meet it. Every time you hit a goal you will have a sense of accomplishment and will push you to carry on with your debt reduction plan so that you can live a debt free life.

 

Struggling to Pay You Loan? Here is What You Can Do

There are times where you will need credit and it can help in many situations, but if you are not able to pay your loan on the date that you originally agreed or you miss payments then credit can become a nightmare. If your financial situation changes or more unexpected occurrences happen then it can create a lot of issues, especially when you are already sitting with outstanding debt.

If you are struggling to pay your loan, then here is what you can do.

Get in Touch with You Loan Providers

If you see that you will not be able to settle your loan balance on the due date or may miss a payment, then the first thing that you will need to do is contact your loan provider. It is a good idea to contact them in writing as proof that you did contact them.

Speak to your loan provider about your situation, inform them that you are not able to pay the loan and ask if they will be willing to work with you to come to an alternative arrangement. Your loan provider is under no obligation to do this, but you might be surprised to find that a lot of lenders will be willing to work with you.

What Happens When You Miss a Payment?

Missing payments does have consequences and here is what happens when you miss the first payment on different types of credit.

Missing Your First Credit Card Payment

When you miss a credit card payment on the agreed date then you will probably incur additional fees and if you miss several credit card payments then you could lose your access to credit cards. You might be able to arrange for your credit card repayment date to be moved to another time in the month, so that you can pay.

Missing Your First Payment on an Instant Loan

Instant loans and payday lenders will require you to pay on a specific agreed date according to the terms and conditions. If you fail to pay and do not make any arrangements with the lender, then you will be issued a legal notice to settle your loan or make arrangements. If you don’t, then your account could be handed to the courts.

Keep in mind that most instant loans are deducted from your bank account when the payment is due and the money is available.

Missing Your First Payment on a Personal Loan

Missing a payment on a personal loan will likely result in a notice to pay from the lender and you may incur additional interest on your loan. If you are about to miss a payment, then you need to contact your loan provider as they might be willing to work with you. There are loan providers that offer debt consolidation loans, which is where you will use credit to settle your debts and then you will have one lower, more affordable loan to pay back.

Missing Your First Payment on a Debit Order

If you have monthly debit order like medical aid or DStv and you do not have enough in your account to pay it, then you may incur additional fees from your bank when payments are declined. Also, money will likely be deducted from your next deposit.

When you miss payments then your credit score will be affected negatively and you will struggle to get credit again in the future.

What Happens When You Don’t Pay?

If you are not able to make an instalment, then you need to try and make alternative arrangements. If you don’t contact your lender, then they will assume that you don’t intend to pay and will proceed down the legal route. Many lenders are willing to work with you, so make sure you contact them.

However, if you have ignored a notice to pay, haven’t settled your account and haven’t contacted your loan provider, then your account will be handed over to a legal representative. You will then be issued with a notice to get in touch with the legal representative and if this is ignored then you could end up in court, which carries costs of its own.

What About Your Credit Score?

You need to know what your credit score is and keep it in good standing. If you miss payments and don’t settle your account then your credit score will be negatively impacted, which will then affect your ability to get credit again in the future.

If You Can’t Handle Your Debt

If you have too much debt and are paying multiple lenders with multiple interest rates, then you should seek the advice of a debt counsellor. They will assess your debt situation and if they find that you are over indebted, then you will be put under debt review. This process will help you to manage your debt and a debt consolidation loan can be used to settle your debts and you will only have one, affordable monthly repayment to make.

If you are struggling with debt then don’t ignore it, speak to your loan providers and if you need help then make sure you get it, so that you can start living a debt free life.

Living Paycheck to Paycheck? You Can Still Save

There are some things that we are not able to go without like food, housing and so on, but when you are living paycheck to paycheck it can be difficult to afford these necessities, especially when things are going up in price. On top of this, you know that you need to save, but this may seem like an impossible scenario.

However, even if you are living paycheck to paycheck, you are still able to save money, you just need to make some smart money moves and you will start building your savings in no time.

saving

Here are some great tips that you can start using to save money when you are living paycheck to paycheck.

Have a Budget

This is the first step and the most obvious thing that you will need to do. You are not able to manage your finances and your spending without a budget. When money is tight, your budget and sticking to it is highly important.

To begin your budget, you should write down what you earn every month and write down every category that you spend money in from your utilities to take away food. You will be able to see what you spend and where you can make cuts.

When you are determining what you are able to spend in each category, make sure that you leave some room for savings, no matter how small.

Keep in mind though that your month’s budget will not be the same every month. For, instance, you may find that you will need to pay for car registration one month and then the next month, you may have something else to pay for and so on.

Also, you may find that you will need to pay a little extra in the summer to keep your house cool or you may need to get birthday gifts etc.

You should write down events like these and when they take place, you can adjust your budget that month in order to accommodate for the extra expenses. This will help you to save, but it will also make sure you and your finances are prepared so that you don’t get any surprises.

Get Your Debt Down

Once, you have got your spending down and made the necessary cutbacks, you can now look at your debt. The faster that you are able to pay off your debt the better as you will pay less in interest.

Start tackling your debt by paying more towards the debt that has the highest interest rate. If your credit card has very high rates, then you can look at getting an online loan that has a lower interest rate than your credit card. The idea then would be to pay off your high interest credit card debt with the loan and then repay the loan. You will save money because the interest rate on the loan is lower.

Wait…there are still more tips below…

saving

Get Rid of Your Cards

If you are finding it hard to stick to your budget or are tempted in the grocery store to buy extra things that you don’t really need then you need to take action.

A credit card makes it harder to stick to a budget, this is because we fall into the trap of just swiping for purchases without thinking about what we are spending or we brush off overspending leaving it as a problem for another day.

If you are having issues like this then you may want to consider cutting up your cards, leaving them at home or even freezing them and just using cash to pay for everything. With cash, you are able to visualize a lot better about how much you are spending, but you are also limited to the amount that you have in your wallet, making overspending a lot more difficult.

Get Yourself a Savings Account

When you are living paycheck to paycheck, you will probably be only able to save a little amount each month. Keeping your savings in your checking account will make it difficult for you to see how much you are saving.

You should open a separate account for your savings, so that you can keep better track of what you are saving. Also, seeing this account grow can help motivate you to keep going and save a little each month. You will also be less likely to spend your savings when you have a separate account.

When you are choosing a savings account, try and find one that offers an interest rate so that your money grows a little each month and one that is free to have.

Ask to Waive the Fee

There are times that you may not have been able to pay a bill on time, so you were given a late fee that hurt your finances, but have you ever thought about asking the company if they would be willing to waive the late fee?

This may not work, but you have nothing to loose by asking and you may find some companies will be willing to do this for you.

Keep reading for some more tips…

saving

Make it a Challenge

Once you have been sticking to your budget for a month or two, you will notice that it gets easier to monitor your spending. This is then the perfect time to challenge yourself to make little cutbacks in all your spending categories. Even if you are not able to cut back in all your categories or only able to make small cutbacks, the money will add up.

Switch Your Car Insurance

You are able to lower your car insurance premiums by shopping around, so you could potentially save money in this area.

Car insurance companies think that once you have signed up with them, you won’t leave and you may think that it is a pain to get new quotes and switch. However, staying with the same company may mean that you are not getting the best deal anymore.

If you have a good driving record but your premium has stayed the same or has even gone up over the past few years, then look at getting some free quotes and see if you are able to save on your premium by switching companies.

Increase Your Earnings

You are only able to cut your spending by so much and once you have done that; you may need to look at ways that you can increase your earnings.

It can be hard to find a job that pays better or to take on another job but there are other ways. You may find online survey companies will pay you to watch videos or take surveys. They don’t pay much but if you do it on a regular basis then you can earn a little extra.

You can also look for a freelance job where you can set your own hours and make some extra cash.

When you are living paycheck to paycheck, you are still able to save money, but you will need to be disciplined and manage your finances so that you can.

Carrying Too Much Debt? 6 Signs to Know If You Are

Many South Africans are carrying debt on both their credit cards and in the form of loans like a car loan. Debt is an unfortunate part of life that is hard to avoid as you may need a loan to buy a home, for instance. However, this doesn’t mean that you can rack up the credit card bills or take unnecessary loans.  

debt

If you carry too much debt then you will need to face it and tackle it head on, but you will need to know and recognize the signs so that you are able to take action sooner rather than later. Here are 6 signs that you are carrying too much debt.

All Your Money Goes to Debt

You should take a moment and determine how much you are spending each month on debt payments. Take a look at your credit card bills and other financial reports and tally up the minimum debt payments and compare this to your monthly income. The ideal scenario is that your debt payments shouldn’t be more than 36% of your gross monthly income, but if you find that half or more of your money is spent on debt repayments then its time to make a change.

If you are just working to pay off your debt, then it can become stressful. You are not able to get rid of your debt overnight, but you can take steps to eliminate some debts. You can look for ways to lower your expenses like renting a cheaper place, getting a roommate, selling your car and taking a cheaper one to lower car repayments, cancelling unnecessary subscription services and so on. Making some changes no matter how small can help towards your debt.

Just Paying the Minimum

If you are struggling to make even the minimum payment on your credit cards, then you are probably carrying too much debt. You can call your credit companies and ask if they would be willing to lower your interest rates. If you have consistently paid on time and have a good history with the creditor, then the company will likely work with you.

Another option is to look for a credit card that has a low introductory offer rate and transfer your balance to this card. The idea here would be to pay all or as much as you can off before the promotional offer ends and adjusts to the higher rate.

A decrease in the rate will lower the current minimum payment and if you continue to pay the original payment, you will be able to pay the debt faster.

More signs of too much debt…keep reading…

There are Physical Side Effects of Too Much Debt

When you have too much debt it often leads to credit cards being nearly maxed out. On top of this, creditors can start calling you if you are behind on your payments. The stress that this can cause can start to affect your happiness, sleep, appetite and cause anxiety and stress. If you are always worrying about your debt, then you probably have too much.

debt

Denied for New Credit

Your credit score is affected by how much debt you owe. The more debt that you have then the harder it will be for you to get new credit. Your approval for credit will come to a quick end as lenders and creditors look at your applications and decide that you are already overextended.

Common reasons for lenders and creditors to reject your application is that you have a low credit score, no credit history, too much credit and high balances.

Nothing in the Savings

When you have a nice nest egg then it shows that you have good personal finance management. This can provide you with an income after a job loss or cash for an emergency. However, if the majority of your money is going towards debt payments then there is probably very little left for savings.  

If you receive an additional income from a side job or if you receive a pay increase it doesn’t mean that you can get a bigger home, a new car or brand new items you don’t really need. Rather have a look at your savings account and determine if you have at least 6 months’ income as a cash reserve or liquid funds. If there is a lack of savings then it is a sign of a huge problem, especially if you are always shopping or taking on new credit.

Paying Your Bills Late

If you are carrying too much debt, then you are probably finding it difficult to keep up with your monthly payments. You could be forgetting about creditors and due dates completely or are sending late payments. When you owe too much, your credit score takes a negative hit and if you start to become late with payments then your credit score can take another hit.

If you find that you do have too much debt, then you will need to come up with a debt plan. You will need to have a disposable income in order to tackle debt, which can be hard to do. You can consider selling items you no longer need and putting this money towards your debt, taking on a part-time job or speaking with your creditors to come up with a plan. Another option is to speak to a debt counselor that can help you with debt and consider debt consolidation that places all your smaller debts into one, so that you have one affordable monthly repayment to make.

Should You Use Another Loan or Go for Debt Counselling?

There are many of us in South Africa that try to solve our debt problems by getting more debt. However, if you are not able to afford one loan, is it really the best idea to take out another loan in order to cover the first?

This will lead you to further debt and put you into a worse financial position. Fact is that the more loans you take out, the more money you will owe and the more interest and fees you will need to pay.

debt

If you are struggling with your debt repayments then taking on further debt will only make the situation worse as your debt will accumulate and as your situation spirals out of control, creditors may choose to take legal action against you.

Another solution to your debt problems could be debt counselling where your debt is consolidated into one and you will not need to take another loan. Your debt is restructured into just one affordable repayment and as you pay this monthly amount, you will be working towards becoming debt free.

A debt counsellor has the ability to negotiate for lower interest rates and longer loan periods as well as offering you legal protection. With debt counselling, you are able to focus on becoming debt free and as you will be paying one lower monthly repayment you will be able to release more cash flow so that you can cover your monthly living expenses without having to resort to credit.

What Are the Main Benefits of Debt Counselling?

The first major benefit of debt counselling is that a debt counsellor will negotiate with your creditors on your behalf and get you a lower interest rate on your debt. They will also ask that the payment terms are extended. For you, this means that you will pay a combined, lower monthly repayment and free up some disposable income.

With debt counselling, you will receive legal protection from your creditors.  Creditors will no longer be able to call you and they will need to go through your debt counsellor. On top of this, your assets will also be protected from repossession, so you will not have to worry about losing your home or car.

As part of debt counselling, you will not be able to apply for new credit, so you will not be able to drive yourself deeper into debt. You can just focus on becoming debt free.

Keep reading to find out once you are debt free with debt counselling…

What Happens After Debt Counselling?

So you have come to the end of your debt counselling journey, so what happens next?

debt free

Once all the paid up letters have been received from your credit providers, you will receive a clearance certificate from your debt counsellor. This letter will confirm that you have settled all your listed accounts under the debt counselling agreement and that all your accounts are paid. This doesn’t include your home loan, which will just need to be up to date with payments.

The credit bureaus will also receive the certificate from your debt counsellor and they will no longer flag you as being under debt counselling.

As soon as your debt counsellor issues your clearance certificate, you are able to apply for credit again. The status of being under debt counselling will no longer have a negative impact on how credit providers perceive you. Instead, they may actually view you as a responsible consumer that understood they were over-indebted and acted accordingly.

However, before you take on any new credit, you should set up a realistic budget and have a financial plan in place. Your debt counsellor or a financial advisor will assist you with a budget and a plan for your future.

So, what happened to your credit score? After debt counselling, your credit score will be low, but you are able to rebuild this by making sure that you pay your accounts on time. You should make sure that any phone contracts, TV subscriptions etc. are paid and up to date.

Once you have completed debt counselling, get a copy of your credit report and see if it is updated. If not, then inform the bureau so that any mistakes can be fixed.

If you ever feel that you are over-indebted, then you can apply for debt counselling. With debt counselling, you can become debt free and get your financial future back on track.

Do You Know How the Debt Spiral Works?

When you first borrow money it might be so that you are able to build credit and usually starts with a store card and a credit card, but as time goes on, you may find that your wallet is full of plastic, your bank account is looking empty and all your money is going towards debt. These are signs that you are being dragged into a debt spiral.

debt spiral

If you feel like you are heading towards the debt spiral, then you need to know the signs and how you can avoid it before you get yourself too far into debt.

You First Get a Store Card

We all know that we need to build credit and have a good credit score so that one day we are able to take a reasonable loan when we need it. Often we start our credit journey with a store card as it is one of the easiest forms of credit to qualify for and you won’t need to have an existing credit record.

You will need to use your store card so that you can start building your credit score. This means you have purchasing power, but you will need to resist overspending and only buy the essentials that you would have normally bought and are able to afford to pay back.

If you buy more then you can afford with a store card, you are going to have debt and a high interest rate to contend with. Avoid impulse buys and only spend what you can afford.

Another Type of Credit

With a store card, you will gain instant buying and after a store card, many will get a credit card as well. A credit card can be used almost anywhere whereas a store card can only be used at the store that issued it, which means you have more buying power with a credit card.

You may think that you need a credit card to build your credit score further or you need it for unexpected emergencies, however, you only need one credit account to build credit card, so rather stick to one type of card, which should be your credit card. Your credit card doesn’t have limitations on where you can use it, but it does have a high credit limit, which can lead to large purchases you can’t afford and debt.

In order to avoid such large spending, especially if you are impulse buyer is to lower the credit limit and to remind yourself of what could happen before you pull your card out.

If you are already sitting with a maxed out credit card and you are not sure what you bought that was essential, then this is already a red flag of the debt spiral.

The debt spiral doesn’t end there…keep reading…

Taking on a New Debt

There might be times in life where you may need to take on new debt, for instance, you may need a new car. If you have a solid credit score and have been making your monthly repayments on your credit and store card, then you will qualify for vehicle finance.

You may think that if a lender is willing to offer credit then you must be able to afford it. However, you are the only one that really knows what you are able to afford.

It might be wiser for you to save up and drive your old car until you are able to afford a new car with cash. A car loan will put you into further debt, but if you really do need a new car and you need to finance it then create a detailed budget. This budget should forecast your finances for the next several months that takes into account your current debt and the potential for other vehicle related expenses.

If your accounts are already maxed out and new vehicle payments will push you beyond your limit then do not accept the car loan.

debt

A Real Emergency

Let’s suppose that you decided to get that new car, even though you couldn’t really afford it and then a real emergency crops up, an unexpected expense that you need to pay for so that you can carry on with your day to day life. How are you going to pay for it? You may opt for a personal loan to cover the expense.

At this point, you may have not missed a payment and your credit score looks good, but in actual fact, you are broke and on the edge of the debt spiral. But you carry on and sign the loan agreement and your debt is taken further than what you can afford.

A Debt to Cover a Debt

So what happens now? You start defaulting on your payments and your credit score starts taking damage. You then think that you should take out a loan to pay for your existing debt, but because of your suffering credit score, you may end up with a loan that has a high interest rate. This can lead you to take out one loan after another in order to pay your lenders. Now you are in over your head and struggling with mounting debt.

This could have all been avoided if you had taken note of the earlier warning signs including maxed out credit cards, debt that is more than your savings and a budget that predicts cash flow problems.

If you are heading in this direction, then you need to stop and focus on reducing your debt and fixing the way you spend money.

How to Know if You Need Debt Counselling

How to Know if You Need Debt Counselling

If you are over-indebted then you might find debt relief through the process of debt counselling, which creates an affordable repayment plan to repay outstanding debt.

debt

You are generally considered to be over-indebted if you struggle with making debt repayments on time or if more than half of your income goes towards paying debt.

With debt counselling, a debt counsellor will measure your expenses and liabilities against your income in order to determine how indebted you are. If your expenses and liabilities are more than your income, then you are over-indebted.

You will need to hand over certain information to your debt counsellor, who will then inform the credit bureaus that are you are under debt counselling and will stop creditors from contacting you. The debt counsellor will then negotiate with creditors on your behalf for lower interest rates and extended payment terms.

You will then only need to pay one reduced monthly instalment towards your debt according to your debt repayment plan.

But how do you know if you need help in managing your debt? Here is how you know that you need debt counselling.

Keep reading and let’s find out if you are over-indebted…

Your Monthly Expenses Are Paid on Credit

If you are using lines of credit like a payday loan, credit card or store cards to pay for your basic monthly expenses like petrol or food then you may be in over your head. It will only be a matter of time before you max out your credit, which will result in hefty damage to your credit record.

You Don’t Have Any Savings

You may want to save, but find that it is almost impossible because your debt repayments are just too high. There is a difference though between having no savings and being unable to save. If you have no savings, then this could be due to poor financial management. If you are unable to save because you do not have the funds to then you could be over-indebted. If you don’t have any money to save and everything is going towards debt and other expenses, then you may need to seek help.

You Are Paying Debt with Debt

If you are borrowing money from family and friends, taking out payday loans, using your overdraft to settle accounts and so on then you are not financially healthy. If you are already not able to afford your debt, then you are just making the situation worse and driving yourself deeper into debt. You will be trapped in a cycle of debt.

Just a couple more signs…

You Can’t Sleep

Being financially stressed is terrible and will eat at you, which will cause sleepless nights, which will then affect you during the day at work etc. This can easily lead to depression and other health issues.

You’re Not On Top

It can be tiring trying to play catch up with your repayments. You may think that skipping one payment isn’t too bad but as soon as you miss one, it means that you have double to pay the next time and so on. You will just have more pressure on you the month after and your situation is not going to get better.

If you can relate to any of the above, then you may need to seek help with your debt through a debt counsellor. Ignoring your debt will not make it go away and the first thing that you need to do is face it and accept that you do need help. Taking the first step in getting help will mean that you are on the right path to leading a debt-free life and could soon say goodbye to your debt troubles.

What Does It Mean to Default on a Loan?

Not everything goes to plan as life is full of surprises and even though you had every intention of paying off your loans, something may come up like a job change or a health event that could put a spanner in the works. This may mean that you eventually default on your loans, but do you know how this will affect you? We take a look at what it means to default on a loan.

loan default

What Happens When You Default?

There are consequences of defaulting on a loan, which shouldn’t be a surprise. Defaulting on a loan will usually damage your credit and can cause additional expenses.

When you fail to make your required payment, your credit will take a hit. You might be in the clear for the first 30 days after the payment is due, but after this, missed payments are reported to the credit bureaus, which will lower your credit score. This will make it more difficult for you to secure a loan in the future and may make it harder for you to sign up to utilities, cell phone contracts, renting and so on.

Unpaid debts may eventually end up in the hands of collection agencies, which will damage your credit and can lead you to court which can be expensive. As time moves forward lenders might be able to garnish your wages or even take assets from your bank accounts.

On top of this, your financial burden may get worse when you default on a loan as this will incur additional charges like late payment fees, penalties and legal costs, which will just increase the amount that you owe.

Keep reading to find out how a default affects your loan type…

What Does a Default Mean for Your Loan

The type of loan that you default on will have different consequences.

If you have a secured loan that is secured with your home or car, then the lender can potentially take ownership of this property and sell it.

Unsecured loans, on the other hand, will damage your credit and lenders can take legal action against you.

If you bought your home with a loan or if you borrowed against your home with a second mortgage or a home equity line of credit, then your lender may force you out through foreclosure and sell your home so that they can recoup the loan costs. If the sale of your home doesn’t cover the whole amount that you owe, then you may find that you will still owe the difference.

If you default on a car loan, the vehicle can be repossessed and sold and you may still owe the difference if the sale doesn’t cover the total amount that you owe.

When you default on your credit card, your credit will definitely suffer as a result and your account will most likely be sent to collections. Also, fees will be added to your debt and collections will make endless phone calls and various attempts to collect.

Don’t Let It Come to a Default

The consequences of defaulting on a loan can be harsh, so it is best to avoid the default altogether.

default on a loan

If you run into financial trouble, then you must communicate with your lender and explain that you are having a hard time making payments.

A default can be looked at by your lender in one of two ways. The first is that you have given your lender a heads up and they could potentially work on a solution with you or they see that you have stopped paying and will start the efforts to collect from you. The first option is obviously the best.

If you are able to come to an arrangement with your lender, then ensure that you document all communications and get all your agreements in writing.

If you are struggling with debt, then it is a good idea to speak to a debt counsellor as they can help you to evaluate your position and set up a debt management plan if needed. Debt consolidation may also be an idea and you can find help through a number of debt relief programmes. Make smart financial decisions if you are in debt, so that you can avoid defaulting and so that you are able to manage your debt better.

5 Signs You Won’t Get Out of Credit Debt

If you think that because you pay the minimum on your credit cards each month and on time that you will one day reach that zero balance, then think again. If you are doing any of the below then you may never pay off your credit cards.

credit card debt

5 Signs You Won’t Get Out of Credit Card Debt 

Just the Minimum

Paying just the minimum required for your credit cards is the slowest way to get out of debt. This is because the minimum will not make a bigger enough dent in your debt to get rid of it.

If you are carrying around a high balance, then it could take you years to pay off your credit card at the minimum payment rate and also the interest is just going to add up over the years.

You’re Still Buying

If you are using any available credit that you have as soon as you make your repayment, then you will probably always have a credit card balance. If you are stuck in a cycle of using your credit cards, then you may never pay off your credit cards. This is one habit that you will need to break if you want to be debt free.

credit card debt

You’re Maxed Out 

The hardest credit cards to pay off are the ones that are maxed out and this is made even harder if you are only paying the minimum on your credit cards. The majority of your payment will go towards finance charges, which can be expensive. If you have multiple maxed out credit cards, then it is only going to be harder to pay them off.

Do You Know What You Owe?

Not knowing what your debt is, is a risky way to live. You are not able to make any sound financial decisions if you are not aware of what your finances look like as a whole. If you are not facing your debt, then you probably also making other bad choices that keep you in debt.

Spending More Than What You Make

The fastest way for you to get into credit card debt is to live above your means. The problem here is that it will just lead you to max out all of your credit cards, which does not make it sustainable and it’s just a bad financial move. You will never have extra money to pay off your credit cards if you are spending more than you have.

These are signs that you will never pay off your debt, but if you change your behaviours and change the way you use and see your credit cards then it is possible to tackle that debt. You will need to increase your payments to more than the minimum and stop using your credit cards, live within your means and face your debt head on.

 

New Year Tips to Tackle Your Credit Card Debt

It’s the new year so its time to get of your credit card debt for good and stop carring balances from month to month. If you want to become debt free then you will need to have a plan in place and be ready to be disciplined with your finances.

credit card debt

Here are some new year tips to tackle your credit card debt and become debt free.

Put It All on One Plastic

If you have multiple credit cards and you are carrying debt on all of these then one thing that you can do is consolidate the credit card debt.

You are able to consolidate in a few ways, but the best option would be to find a credit card that has a 0% interest rate for a certain period of time. The payment that you make each month will then go towards the principal amount and not the interest. Also, moving your credit card debt to one card will allow you to pay just one monthly repayment instead of having to juggle multiple payments and interest rates.

Keep in mind with these type of cards that the 0% interest period will end and once it has you will start to pay interest. This will only really work if you are able to clear your debt before the promotional period ends.

Another option that you can consider is taking a personal loan to consolidate your credit card debt with. Personal loans usually have a lower interest rate and you will just have one lender and one repayment to make each month.

Tackle the Highest Interest First

If taking on a new credit card isn’t right for you then you do have other options. One strategy that many people use is to focus on the credit card that has the highest interest rate first. This method is called the debt avalanche method.

With this method, list all your credit cards on a piece of paper, in order of highest interest to the lowest. Each month make the budgeted repayment towards the highest interest card and the minimum payment on the others. Your repayment on the highest interest rate card should be more than the minimum and an amount that you are able to afford in your budget. Once the card with the highest interest rate is paid off, you can move onto the next card and so on. This will help you to limit the amount that you are paying in interest each month.

Start Small

Another method is the opposite of the above and is called the debt snowball method. With this method, you will focus on the card that has the lowest balance first, so list all your cards from the lowest to the highest.

The idea here is to pay off credit card debt whilst maintaining momentum with small victories when a card is paid down.

However, if you use this method, you will be paying more in interest compared to the debt avalanche method, but many find this tactic motivating.

There are still more tips below, so keep reading to find out more…

credit card debt

Can You Get a Lower Rate?

If you have had your credit card for a long period of time, then it could be an idea to call your card issuer and see if you are able to get a lower rate.

Credit card companies are sometimes willing to work with you, especially if you have a track record of making timely repayments and have a good credit score. You can ask them to reduce your rate based on your past history.

You could also negotiate with your credit card issuer by showing them a competitors offer. If you find an offer that has a lower interest rate, then you can use this for negotiation.

How Did You Get Here?

Not only do you need to pay off your credit card debt, you also need to understand how you got into debt so that you can avoid being in the same position again in the future.

You will need to analyse your spending habits and behaviours that got you into debt and start making changes Credit cards can be valuable tools, but only when they are used correctly.

Can You Really Afford That? 

Many of us will find ourselves in credit card debt because we didn’t stop and think about what we are buying. Before you make any purchases you need to take a step back and think if you are really able to afford it. If not, then you should be rethinking the purchase.

credit card debt

Never Miss a Payment

It is never a good idea to skip a credit card payment as this can be harmful to your credit score and you will just drive yourself further into debt because instead of having just the one payment to make, you will now have two and a possible late fee.

Know the Signs

You are able to avoid credit card debt in the future when you know the signs. One big sign is that you end up using your credit card for necessities like food, rent and clothing. Other signs include missing payments on one card so you can pay another, ignoring credit card statements and so on. These are signs that you are heading down the wrong path and you will need to take a step back and evaluate where you are financially.

As the new year unfolds tackling your credit card debt should be a priority and once your debt is paid off, you need to avoid heading down that road again.