Heed warnings of a debt crisis
And here’s how to avoid being swept away by your bills
THE tumble into the hole of consumer debt can happen in slow motion, sometimes taking years to develop. Consumer debt involves facilities such as credit cards, personal and revolving loans, and clothing or furniture accounts.
Very often there are signs that you are on the edge of the financial vortex, and knowing what the red flags are and what you can do to escape can help you avoid disaster.
Here are some of the danger signs to beware of:
Using credit facilities faster than you can pay them back.
Usually, this begins when you make hasty financial decisions to cover up a shortfall. Increasing your credit limit to accommodate costs, and then reaching that limit within a month of the increase, is a warning sign. So is making the minimum payment required for the credit card . . . then spending the balance again;
Taking out loans to pay your monthly bills.
Robbing Philani to pay Phalo is bound to get you into a financial mess. The moment you start supplementing credit repayments and disposable income with, for example, a revolving loan, is the moment you need to realise you are in deep trouble. If you pay your credit card debt only to withdraw funds a few days later to pay another credit account, you’re definitely in the quagmire of consumer debt.
You also need to be aware that the loan might cover your obligations for this month, but if you’re in chronic financial distress, then you’ve just added yet another payment that you’ll need to make provision for next month;
Using or abusing revolving loans.
Constantly withdrawing the money you have borrowed, but never paying it back, can spell financial disaster, especially if that well dries up and you were relying on it to meet your financial obligations;
Hopping from credit provider to credit provider to see where you might get lucky:
Throwing mud at the wall in the hope some of it sticks is never a good idea when it comes to credit: it usually indicates that you’re already too deeply in debt.
Don’t forget: all these credit applications are passed on to the credit bureaux and they will ultimately affect your credit score. As a result, you will probably only be able to get credit again once your record has been cleaned up; and
Turning to informal credit: When you find yourself often borrowing money from family, friends and loan sharks because established institutions will no longer give you money, then you’re in such bad trouble you need to get help.
So, what can you do to save yourself?
Speak to your credit providers and explain your situation. They might be open to negotiating with you about how best to pay them back within your means;
Draw up a budget and, if need be, make drastic lifestyle changes to cut costs; and
Put together a debt repayment plan for your credit. Remember to be realistic about what you can do and the time you set yourself to pay back the money.
Getting out of financial distress will take time, candid communication with your creditors and a willingness to make changes to what you spend your money on. Do not expect the problem, which may have taken years to develop, to be solved overnight.
Tsamela is a community manager at Standard Bank Securities. Follow her on Twitter @DineoTsamela