In many drastic or emergency situations, any one of us could find ourselves in over our heads financially, wracked with anxiety over our inability to repay our debts. Retrenchment and sudden unemployment, divorce, an unexpected medical scenario and/or emergency expenses, continuous fuel price hikes, the list goes on. No-one is immune from becoming over-indebted.
You’re not alone
Statistics show that more than 11 million credit-active South African consumers are over-indebted. The majority of debt (94%) is caused by personal loans, 84% due to irresponsible use of credit cards, and 76% as a result of store cards.
How do you know if you may be over-indebted?
Being hounded by credit providers who claim that you need to pay the full arrears on your account or legal steps will be taken against you, borrowing money to pay other debts, using your credit card and/or overdraft facility to pay debts, or skipping payments on some accounts in order to pay others, are all red flags that you may be over-extended.
Know exactly where you stand
To get a better idea of how serious your situation is, you need to obtain a copy of your full credit report, which gives a breakdown of all your creditors and how much you owe each one. This can be requested from one of the major credit bureaus for free once a year. Next, you need to sit down and look at your budget to see if there are things that you can forego for a period of time, at least till you get your finances sorted out.
50/30/20 budget split
A good rule of thumb when dividing up your take-home salary is the 50/30/20 rule. Fifty per cent of your budget is for needs, or essentials, which include home loans, car financing, and credit cards – because if you fail to make one of those minimum monthly instalments, it will have a negative impact on your credit score. Any payments you manage to make over and above these instalments would fall into the savings and debt repayment portion of your budget. Thirty per cent of your budget is for wants, or discretionary lifestyle spend, which includes cellphone contracts or airtime. And the final 20 per cent of your budget is for building an emergency savings fund, a diversified investment portfolio, and repaying your debts.
If your disposable income is not sufficient to cover all your contractual obligations, and you know you are unable to service all your current debts in full timeously, it’s time to seek professional debt relief. The worst thing you can do at this stage is procrastinate, because the further in arrears you get, the more penalties you will have to pay, which just inflates the outstanding balance. And if some form of debt collection has already commenced on the account, then legal fees will also inflate that balance. Your credit record will be tarnished, more credit will be impossible to obtain, and you may even end up losing your car, your home, or other valuable assets.