What’s your reaction when the credit card bills roll in? Fear? Horror? Remorse? For some of us, credit cards are just a convenience – they use them to make life easy, pay their bills off in full, and reap the rewards. For the rest of us (and it’s a large proportion), credit cards are a way to fund the gap between the lifestyle we want and the lifestyle we can afford. In other words, we love that they allow us to make purchases at will – and we also hate them regularly (like when the bills come in).
So what to do about your credit card debt? Unfortunately, the figures can sometimes seem insurmountable, with no way out of the debt hole. But there’s always a way. It takes time, sacrifice - and a plan.
1. Stop spending on your credit card. All efforts to pay off your card are negated if you keep topping it up each month. Put. Down. The. Credit. Card.
2. Assess your comfort level. You’re making the minimum repayments, everyone else has debt – credit card debt is just something we live with, right? The question is, should you be more concerned? Fifty years ago, people didn’t buy things if they didn’t have the cash. Today, we think nothing of putting our groceries on credit – actually taking out a loan to buy food. We convince ourselves it’s okay because everyone else is doing it too. But getting too comfortable with debt can be the first step towards real financial problems. Taking a long hard look at your debt situation might give you the motivation to do something about it.
3. Work out how much credit you can afford. If you’re using one credit card to make payments on another, chances are you’re in over your head. Even if that’s not you, it’s a good idea to assess your debt load. In an ideal world, it would take less than 10% of your take-home monthly pay to service all your consumer debt (includes credit cards, store cards, car loans, etc.). How’s it looking for you? If you’re monthly payments are eating up more than 20 % of your take-home pay, experts suggest it’s time to put the brakes on.
4. Beware credit creep. What was your credit card limit when you took out your card? What is it now? If you think nothing of ticking the box when the bank sends you a cheery letter suggesting a “pre-approved credit limit increase”, think again. Even if you’re not receiving many now - no doubt you’ve had them in the past.
Research suggests that people agree to the increases because they think the bank wouldn’t offer it to them if the bank didn’t think they could afford it. Wrong. If you can make your minimum repayments, the bank is happy – the longer you carry a balance on your card, the more interest you pay. If your credit limit has crept up over the past few years, you may want to consider a decrease.
5. Understand that the minimum repayment is not your friend. Usually your monthly minimum repayment is pretty manageable. You might even think that if you just keep paying it, eventually you’ll clear your debt. Did you know that if you only paid the minimum repayment on a R1000 it will take you more than 11 years to get to zero – and that assumes that you stop spending on the card!
6. Take action. The trouble with credit card debt is that there is no set repayment and no set timeline for the debt to be repaid. So the onus is all on you to make it happen. The quickest way to drop your debt is to throw as much money at it as you can. Consider a second job if small spending cuts aren’t making a lot of difference, or perhaps you could join the OLX revolution and sell stuff you don’t need anymore online. First thing you need to do is to create a budget.
7. Look at your options. Depending on the size of your debt, you have different options to help get on top of it. Smaller debts can usually be knocked over with some budgeting sacrifices and commitment. If you have savings, put them on your credit card. With most savings accounts earning less than 5% interest and most credit cards attracting interest rates of at least 12%, it doesn’t take a mathematician to work out that you’re not making money while you have debt.
8. Take it seriously. Higher debts need a more considered approach. It may be that a personal loan – usually with lower interest rates and a set repayment plan – may work for you. Or, if you have a mortgage, you may be able to roll your debt into that. Both of these options need research.
Just always remember the first and most important rule to abide by: Do not live beyond your means.
Money saving tips:
Have a spending plan (budget) and stick to it.
Cut/ reduce spending on the following luxury or unnecessary items in your monthly budget:
If you drive an expensive car, consider down-grading to a less expensive one. This will reduce your monthly instalments and enable you to pay other debts. Also consider using public transport as a cheaper option or cutting out unnecessary trips.
If you are no longer able to afford the house you live in, consider selling it and finding accommodation that is more affordable.
Review your insurance policies – you may find that you do not need some of them. Contact an independent financial advisor to guide you. Use the savings you made from your adjustment to pay the most expensive loans, such as micro-loans and credit cards.
Consider obtaining a second job to supplement your income, if possible.
I am over-indebted and overwhelmed with all of this!
The first step is to approach your credit provider, and negotiate lower instalments. If this fails, contact a registered debt counsellor who can negotiate on your behalf.
If you still feel overwhelmed and unable to reduce your monthly expenditure, there is help available, via the National Credit Regulator (NCR). You can contact the NCR at 0860 627 627; to locate a NCR in your area visit the NCR’s website (see ‘Register of Registrants’, and select ‘Debt Counsellors’).
But how can a debt counsellor help me?
The National Credit Act protects consumers who enter into credit agreements by monitoring and regulating their credit transactions. The Act also makes provision for debt counselling, to assist consumers who are unable to meet all their financial obligations by the required payment deadlines.
The Act requires all debt counsellors to be registered with the NCR, in order to assist consumers. Once a debt counsellor has established that you are indeed over-indebted, he/she will be able to:
Give you budget advice
Restructure your debts
Negotiate with credit providers, on your behalf, to lower your instalments
Reduce your debts to manageable levels with the aim of improving your overall financial situation
Provide you with basic information necessary to resolve your day-to-day credit problems, to avoid being caught in the same debt trap
Provide you with support and after-care services such as budgeting skills
Monitor your payments to credit providers
For more information:
Department of Trade and Industry: Take control of your finances