If you have ever tried to buy a house, you will be sure to have been told that one of the key considerations in the decision-making process would have been your credit profile and the score attached to it. As a certified financial planner, I have come across so many people with various theories of what type of debt they need to take on to build a credit profile. The unfortunate part is that these theories are consolidated over the weekend braai and people end up taking on debt that they cannot manage responsibly until it begins to eat them alive. When it really matters and they now need the debt to buy a home, their application is rejected due to a bad credit profile.
So you have maxed out your credit card, have 2 personal loans, 3 store loan accounts, a revolving loan, and a motor vehicle loan and are feeling like rupture should now happen to deliver you from the financial obligations. You are definitely drowning and start the count down to month end 5 days after every salary comes in because you have so little left over after everyone has taken their share of your hard earned income, how do you get out of this mess!
An important starting point would be to realise that you have a problem and that you have to stop using the credit facilities immediately. Decide to start living within your means and stop competing with the Jones. If you can, contact each lender and tell them to cap the credit facility limit to the amounts you already have outstanding. Next would be to create a debt schedule which is a list of each amount you owe, the term of each loan, how much each monthly repayment is and what the interest rate you pay is, using the template below:
Example of a debt schedule
|Name||Amount Owing||Monthly Repayment||Term||Interest Rate|
|Foschini||R3 000||R150||24 months||24%|
|Game||R8 000||R300||48 months||21%|
|Capitec personal loan||R50 000||R1 000||60 months||18%|
|FNB Credit Card||R20 000||R380||60 months||17%|
|Wesbank Car Loan||R150 000||R2500||72 months||10%|
* These values are hypothetical and for illustrative purposes only
Once you have completed this exercise, you want to do a good old-fashioned budget to see what you can trim off to free up some cashflow. Generally, each lender will ask you to pay a monthly repayment that ensures that you stay indebted for as long as possible. Your interest payment is in their interest, no pun intended. Have you ever wondered why you have been paying for some of these debts for years, but it seems they never go away, and you seem to be stuck with them like a bad flue? Unless, you start paying a little extra each month, chances are you will have to pay off those debts until the last month of each term. The sad reality is that the cost of the debt escalates the value of the loans by almost 2-3 times over the loan term. Simply put, if you bought couches at Game for R8 000, by the time you finish paying for them 4 years later, you will have paid close to R14 400 meanwhile the resale value of the couches would now be R4 000 if you are lucky.
This is probably one of the hardest parts because, trimming expenditure is never easy but it is a critical step to becoming debt free. The sacrifices you make today will be worthwhile in the long run. Now that you have decided to stop going for the spa treatments every month and to stop eating out or ordering in food 12 times a month, you are well on your way to becoming debt free.