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.
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.
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.
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.
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.