Get your personal debt under control

Consumers typically start each year with higher debt levels after the holiday free-spending, with 2022 bringing more challenges than usual.

“We are facing higher inflation, rising electricity, gasoline and food prices, and higher interest rates,” says Tonia Pavlou, deputy chief financial officer of RCS credit provider.

It is significant that Pavlou warns of an over-indebted population as RCS is involved in providing credit to consumers, and in particular store cards for use at most retail chains in SA.

“The statistics are worrying and indicate that consumers have experienced considerable strain during the first quarter of the year. Historically, overspending during the holiday season has a domino effect on the first months of the year.

“A recent report by market research consultancy Eighty20 found that members of the mass credit market in SA can be characterized as ‘stressed’ in relation to their level of indebtedness. The mass credit market accounts for the majority of credit-active people, 82% of whom have retail credit and a fifth of whom have credit cards.

“Typically, this market has a monthly install to net income ratio of more than 70% or at least two defaulting loans,” says Pavlou.

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Credit data available at the end of December 2021 showed that the middle class is slipping further into debt, according to the recent Credit Stress Report from Eighty20 Consulting. “Vehicle asset financing and credit cards were the hardest hit, with overdue debt up 35% and 20% year-on-year, respectively.

“After falling nearly 30% in the past four years, the number of outstanding loans has stabilized, with almost no increase in real loan accounts, although the retail trade defied expectations in December with growth of 3. 1% over the previous year, “according to the report.

Eighty20 notes that the number of credit accounts with at least nine months past due (which make up half of all outstanding loans) continues to grow, albeit at a slower pace.

He says the percentage of loans in good standing has remained stable over the past year at 62%, neglecting to point out that nearly 40% of all loans are in arrears.

This equates to many people with financial problems.

Financially stressed

RCS would classify people who are obligated to pay more than 70% of their debt income as over-indebted.

In reality, it means that someone earning R20,000 after tax will see R14,000 disappear towards debt service. It is gone – only R6,000 remains – before I get within 15 meters of an ATM after working a full month.

Pavlou says that someone who needs to pay 65% ​​of their income for debt service and is up to date with all their installations and repayments would not be considered over-indebted.

It still seems like an awkward position, which raises the question of how much debt an individual should have.

“There is no definitive answer. Everyone is unique and everyone has different circumstances, ”says Pavlou.

He says that people have a “fear” of financial affairs, simply saying they are not financially inclined. During an interview with Moneyweb, you have noted several times that people should have a good “relationship” with their finances.

“The quieter winter season is the ideal time to reflect on finances and, if necessary, work on your relationship with your debt,” he adds.

There are small but significant steps that can be taken to improve your financial position.

New debt

When considering new debt, people should be aware of what they are taking on, understand the need for it, and understand repayment obligations. The new debt should be considered taking into account other commitments and revenues.

Take action if you are too indebted or are feeling stressed about your financial situation, Pavlou says.

“The journey to becoming less indebted and financially secure starts with good planning, followed by consistency.

“If you are struggling to reduce the amount of debt accumulated over the summer months or are concerned about rising prices and rising interest rates, you can focus on making a concerted effort to work closely with your debt cycle. .

“You can do this by avoiding the things that trigger overspending. For some people, this may mean temporarily unsubscribing from those promotional offers that your favorite retailers send out on a regular basis.

“For others, it could mean ending visits to shopping centers.

“Eliminating the temptations and opportunities to overspend while you’re working to reduce your debt can go a long way towards achieving a long-term goal of financial fitness,” he says.

Pavlou also notes that the reality of being over-indebted can be emotionally distressing and can have wider consequences in other areas of your life.

Written plan

The first step is to create a debt repayment plan, using a basic Excel spreadsheet or writing a list of exactly how much is owed to whom. This information is readily available.

“Seeing the figures on the card will give you a complete view of your finances and will help you strategically plan to repay your debt,” says Pavlou.

“Decide which debt to pay first to improve your cash flow.

“Track your progress. Seeing debt reduction helps [you] to feel less overwhelmed and keep you motivated to stay consistent with your repayments, ”says Pavlou, warning that it could be a lengthy process.

“Receiving an unexpected boon such as income from a side business, tax refund, gift or bonus will always be a welcome surprise. The unfortunate reality is that any extra income means extra expense.

“Challenge this mentality.

“Invest in your future self by paying today’s debt. The opportunity to indulge is still there, you are just choosing not to exercise it immediately, but rather at a future date.

“If you can manage your debt, you will accelerate your journey to greater financial security.

“Prepare for specific milestones to make your financial journey a positive experience, with a long-term vision,” he says.

His plan is simple:

  • Make a list of all your monthly debts and payments
  • Decide which bills to pay first
  • Check your progress regularly
  • Beware of temptations
  • Set new financial goals

Pavlou says people also need to educate themselves on responsible debt use and educate themselves on issues related to their personal finances in general. Embrace your personal finances. Don’t let debt keep you awake, ”he says.

Incidentally, the opportunity to question the account manager of the PR firm that organized my meeting with RCS was too good to miss.

A little surprised, he nevertheless shared his situation. “At this stage, I have very little debt. I have just started my career. At the moment I only have a car loan.

“I am fortunate that a lot of information on personal finances crosses over[es] my desk. I’m learning a lot and I have a financial plan in place, ”she says, also noting that he wants to maintain a good credit score.

This article first appeared on Moneyweb and has been republished with permission.
Read the original article here.

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