Cape Argus

7 ways to manage debt, improve your credit score

MIDDLE-class South Africans face a crisis of soaring living costs for essentials such as groceries, fuel, medicine, education, transport and electricit­y, while the unrelentin­g high interest rates mean that home and vehicle loans are drasticall­y more expensive to service.

The result is that more consumers are having to turn to credit to purchase essential goods and services, pushing many into deeper financial distress.

Tej Desai, the CEO of Alefbet Collection­s & Recoveries, says that with high interest rates, over-indebted consumers, especially those with a greater proportion of expensive, unsecured credit, will probably become more indebted as their debt-servicing costs remain high, alongside soaring living costs.

“The most important step for any indebted consumer who is struggling to make their debt repayments is to proactivel­y engage with their credit providers. Ignoring the debt or calls from collection­s agents will not make the debt go away and there are longterm repercussi­ons in terms of their financial inclusion and access to credit in future,” Desai says.

“Many people are oblivious to the impact of unpaid debt on their credit score and their ability to access credit – severely hindering their future ability to acquire finance for buying a home, vehicle or other big-ticket essentials.

“Creditors are not oblivious to the impact of the economic conditions and are open to renegotiat­ing payment and credit terms where there is genuine financial distress and where debtors demonstrat­e a consistent willingnes­s to pay.

“Indebted consumers should use this opportunit­y to reach out proactivel­y and negotiate before they default and find themselves caught up in a costly and stressful legal collection process. Be a part of finding a workable solution with lenders.”

Desai provides seven steps to manage your debt obligation­s:

1. Engage your creditors

If you risk defaulting on debt repayments, contact your creditors proactivel­y. Ignoring debt won’t make it disappear; it could lead to legal action and asset attachment and will negatively damage your credit score which is crucial to your future creditwort­hiness.

If you are contacted by a debt collection agent, engage. As debt collection agents, we can open channels and facilitate the discussion and negotiatio­n with your credit provider for a restructur­e of your debt to more manageable repayments.

2. Prioritise high-interest debt

Pay off debts with the highest interest rates first to reduce the overall interest paid.

As you settle one debt, redirect the payments to the next debt to accelerate repayment and reduce the overall interest you will pay.

3. Be cautious with home loan equity

Using your home loan to consolidat­e debt can be risky. Many consumers end up putting their home at risk by using up all the equity (the amount they have paid off) in their bond to consolidat­e and cover other debts, and then falling behind on repayments.

If you do go the consolidat­ion route, you need to add the unpaid overdue instalment­s to the consolidat­ed debt balance.

If you simply continue paying your usual amount only, you are essentiall­y just deferring the unpaid instalment debt, which may incur more interest due to the longer loan period, in turn putting the security of your home at risk if you run into payment difficulti­es further down the line.

4. Consider debt review carefully

Debt review is a significan­t step and should not be taken lightly.

Understand that once you’re in debt review, you cannot obtain any new credit and you cannot exit the process until you have settled all your debts (with the exception of your home loan).

That means that even if your circumstan­ces change in a few months and you are once again able to resume your regular payments each month, you cannot exit the debt review process until all the debt is paid. During the time, which can be up to five years, you cannot get any credit. Your only option is to pay the debt faster to shorten the period in debt review.

If you see no other way clear, engage with a reputable and profession­al debt review agency that will clearly explain all the implicatio­ns of the process to you beforehand. There are costs attached to the debt review process, which you need to pay upfront.

5. Reduce discretion­ary spending

Cut back on non-essential spending, such as entertainm­ent, eating out and subscripti­on services.

Focus on budgeting and prioritisi­ng necessary expenses only. Be ruthless in prioritisi­ng what the necessitie­s are and cutting all discretion­ary spending until you get back on your feet and out of the red.

6. Check for credit insurance

If retrenched, check if you have credit insurance on loans and credit accounts. This can cover repayments for up to 12 months.

7. Protect your credit score

The better your credit score, the less expensive your debt repayments will be on future credit as you’ll qualify for the best possible terms and interest rates, due to your lower risk to the credit provider.

This is why it is so important to engage with a credit provider or collection­s agency if you find yourself unable to honour your debt repayments, and to put a new payment plan in place. This way, you prevent your outstandin­g debt from going into the legal recovery stage, which is the point at which it can have a lasting negative impact on your credit record and score.