The festive season is synonymous with spending. Whether it is holidays, shopping, food or gifts, this period is marked with unnecessary expenses, with many South Africans taking on credit to get them through this period and finding themselves in a financial fix by January.
It is however important to borrow money responsibly so that it is possible to repay a loan on time whilst keeping a healthy credit score. Credit can serve as a useful tool to build a financial journey, but it is vital to understand what is involved in borrowing (and repaying) money, how interest rates work and of how debt can be used sensibly to support goals and aspirations.
“Borrowing money to pay for things that are not necessarily needed should be avoided. This includes things such as expensive clothes, the latest electronics, or pricey holidays. Once these are worn out, burnt out, or over, there is nothing to show for them,” says James Williams, Head of Marketing at Wonga.
Williams provides some useful tips on how to manage debt responsibly:
Budget and categorise
An effective budget helps to categorise and prioritise debt. When applying for credit, consider interest charged, as this determines the total amount that will be repaid over time - and debt that incurs higher interest rates should be settled first.
Pay off and cut up store cards
Many customers apply for store cards that can be used to fund impulse purchases, but store accounts can charge high interest and management fees that quickly add up. Try to live by the simple principle that if you cannot afford to pay cash for unnecessary items that are more of a ‘want’ than a ‘need’, don’t pay at all.
Pay yourself first
Prioritise payments to accounts that will either grow in value over time, or will cost less money going forward. For example, if you prioritise making repayments on a loan before saving, you will in fact be spending less money over time, and will have more money in the future to commit to your savings goals.
Re-evaluate your assets
Avoid taking on expenses that are unaffordable. Major purchases come with their own set of expenses that will steadily increase over time. If possible, consider either renting or using public transport. This will cost less and will help to avoid further debt and free up additional income to repay debt.
If necessary, consolidate
If you have very high levels of debt and are unable to reliably make monthly payments on that debt, seek out a reputable debt counsellor who will provide a step-by-step guide of how to manage your debt repayments. Multiple loans can be bundled into one simple monthly repayment at a new, and often lower, interest rate.
It is worthwhile to remember, however, that debt counsellors may charge fees to consolidate your accounts, which could see you pay even more money over a longer period of time. You will also not be able to apply for any other credit until your debt repayment plan from your debt counsellor is paid up and complete.
“Getting out of debt requires patience, discipline, and the willingness to keep on track with your promised repayments. By far, the most valuable step you can take to become debt-free is to avoid relying on new credit to repay your existing loans,” concludes Williams.