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JOHANNESBURG - The 2017 Old Mutual Savings & Investment Monitor indicates that South Africa’s metropolitan working population spends an average of 19% of their salaries on paying back debt. Despite this, only 48% of the 24 million credit-active consumers in the country are up to date with their credit repayments, according to the National Credit Monitor’s report on the first quarter of 2017.

“For some people, the situation has become so desperate that they look for a quick financial fix by opting for a fast loan to pay another loan,” says John Manyike, the head of financial education at Old Mutual. “This can be a crippling decision, as it only adds to long-term financial strain and starts a vicious cycle of debt that is very hard to get out of.”

Applying for a loan makes sense only if it’s part of a wealth-creation plan or a carefully worked-out debt consolidation plan, says Manyike.

He says, to get a firm grip on their debt, South Africans must fully understand the serious implications of over-indebtedness.

“Bringing debt under control is very much like treating an illness. You must diagnose and understand your illness and then treat it accordingly. When it comes to debt, you must know your credit score and your debt, take responsibility – put a financial plan in place to settle your debt – and replace poor financial habits with conscientious and responsible actions to manage your finances better,” says Manyike.

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It is essential to settle debt in an orderly fashion, to ensure you get a good credit score, which will open doors for car or home loans in future.

“Each person has a credit profile at a credit bureau that shows how much money you have borrowed and how responsible you have been in repaying that debt. Your credit score will reflect your dependability. A good credit score will allow you to get credit when you need it, while a bad credit score will create stumbling blocks. Some employers also consider credit profiles before making hiring decisions,” he says.

Here are Manyike’s seven steps to demolish your debt while improving your credit score:

1. Understand your credit report

Under the National Credit Act, you are entitled to a free credit report every 12 months. Most credit companies will offer this to you during your birthday month. It is important to go through your credit report every year and make sure you understand all the information in it. If you discover any incorrect information, you must lodge a dispute for unfair credit information. If you don’t do this, you could have problems when applying for credit in the future.

2. Draw up a budget

When you draw up your monthly budget, list all your expenses. Distinguish between the essentials you need to survive and the unnecessary expenses that you can eliminate. This will give you extra funds with which to pay your debts much faster. Doesn’t it make good sense to bring lunch from home every day rather than buying it at work, if it means you can reduce your debt at month-end?

3. Familiarise yourself with all your debts

If you are in trouble and can’t pay the minimum due every month, list all your debts and communicate with your creditors in writing, explaining your situation. Also, consider consolidating all your debts into one loan. Doing this will make the debt easier to manage and make you feel more in control, which will reduce stress and anxiety.

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4. Try to pay off debts faster

Where possible, pay more than the required minimum monthly instalments. This saves on future interest that would have been charged by the creditor, positively influencing your credit score.

Consider approaching a financial adviser or debt counsellor for advice and practical assistance.

5. Communicate with your creditors

If you lose your job, inform your creditors in writing as soon as possible. Follow up to make sure that they have received your communication.  

6. Look for additional income

Try to find a second source of income. Every extra bit helps. If you enjoy cooking or baking, consider providing working parents with family meals for extra money. If you are good with fixing cars, put the word out on the street that you can assist with vehicle services in your spare time. Find something you enjoy and try to derive extra income from it.

7. Break the bad habits … and start good ones

Make a conscious decision today to change poor behavioural patterns when handling your finances, such as impulsive spending. Make up your mind to save – and stick to it. The truth is that bad financial habits are at the root of poor money management. Become disciplined and commit to new, responsible actions that will turn into positive habits that will help you to save and build up your wealth. You will soon see results that will reinforce your good habits … and the virtuous circle will continue to reward you.  

- PERSONAL FINANCE ONLINE