Buying on credit can be part of good financial planning … or it can lead to disaster. Many South Africans have learnt this lesson the hard way. It’s almost impossible to live totally debt free. Used wisely, credit is a great way to make life easier when cash is short. Unfortunately, it can also lead to massive overspending.
There is definitely a difference between debt which can be considered healthy and debts which are just plain detrimental to your financial situation. The key is to identify these early on. Online ‘sameday loans’ provider Wonga has put together a lovely piece which provides valuable insights into the various kinds of debts you will encounter.
There’s a thin line between enjoying credit and trapping yourself in debt. Remember that each time you open a new account, you fall deeper into debt, meaning you’ll spend more money on credit repayments each month and have less and less cash on hand for day to day expenses.
If you’re already playing catch up with runaway debt, promise yourself that from today you’ll take control and limit your debt to amounts that you can comfortably afford.
Here are seven rules to live by for comfortable credit:
- Know your debt: Get to know the real cost of credit. Work out exactly what you’re paying off each month in terms of fees and interests. Now make it your priority to pay off debts with the highest interest rate first.
- Consolidate your debt: One effective way to manage monthly debt repayments is to consolidate your debt. Chat to your bank about their interest rates and fees; you might find it’s more cost-effective to borrow money from them to pay off all your debts at once and then focus on paying the bank back. This article on Investopedia goes into more detail about debt consolidation and also teaches you how to manage your debt situation independently.
- Live within your means: Before you commit to a purchase, it’s a good idea to ask whether the immediate joy it will give you is worth the angst of worrying about how you’ll afford it. Most times the answer will be no!
- Plan before you buy: Pay for necessities such as food or clothing with cash rather than on account if your budget allows. If you simply pop everything into an account you’ll be tempted to buy more than you really need or planned for.
- Consider your options: Before you sign a credit agreement, ask yourself: ”Is there a better option?” Buying on hire purchase, for example, can seem like a great idea because the expense is spread out thinly over a long period of time. But in the end, you’re paying much more for what you’re buying and this can put a strain on your budget.
- Take debt seriously: Remember that there are serious implications of not being able to afford your credit repayments. Every missed payment pushes up the interest and goes towards creating a bad credit record, making it difficult to get credit in the future.
- Don’t despair: With self-discipline, honesty and careful budgeting, you can escape and avoid the debt trap.