7 ways to manage debt and improve your credit score

Middle-class South Africans face a crisis of soaring living costs for essentials such as groceries, fuel, medicine, education, transport and electricity, while the unrelenting high interest rates mean that home and vehicle loans are drastically more expensive to service. The result is that more consumers turn to credit to purchase essential goods and services, pushing many into deeper financial distress.

Chief executive of Alefbet Collections & Recoveries Tej Desai, says that with high interest rates, over-indebted consumers, especially those with a greater proportion of expensive, unsecured credit, are likely to become more indebted as their debt servicing costs remain high, alongside soaring living costs.

“The most important step for any indebted consumer who is struggling to make their debt repayments is to proactively engage with their credit providers. Ignoring the debt or calls from collections agents will not make the debt go away and there are long term repercussions in terms of their financial inclusion and access to credit in future. Many people are oblivious to the impact of unpaid debt on their credit score and their ability to access credit – severely hindering their future ability to acquire finance for buying a home, vehicle or other big-ticket essentials,” Desai says.

“Creditors are not oblivious to the impact of the current economic conditions and are open to renegotiating payment and credit terms where there is genuine financial distress and where debtors demonstrate a consistent willingness to pay. Indebted consumers should use this opportunity to reach out proactively and negotiate before they default and find themselves caught up in a costly and stressful legal collection process. Be a part of finding a workable solution with lenders,” he says.

Desai provides seven steps to manage your debt obligations:

1. Engage with creditors

If you risk defaulting on debt repayments, contact your creditors proactively. Ignoring debt won’t make it disappear; it can lead to legal action and asset attachment and will negatively damage your credit score which is crucial to your future creditworthiness.

If you are contacted by a debt collection agent, engage! As debt collection agents, we can open channels and facilitate the discussion and negotiation with your credit provider for a restructuring of your debt to more manageable repayments.

2. Prioritise high-interest debt

Pay off debts with the highest interest rates first to reduce the overall interest paid.

As you settle one debt, redirect those payments to the next debt to accelerate repayment and reduce the overall interest you will pay.

3. Be cautious with home loan equity

Using your home loan to consolidate debt can be risky. Many consumers end up putting their home at risk by using up all the equity (the amount they have already paid off) in their bond to consolidate and cover other debts, and then falling behind on repayments.

If you do go the consolidation route, you need to add the unpaid overdue instalments to the consolidated debt balance. If you simply continue paying your usual amount only, you are essentially just deferring the unpaid instalment debt, which may incur more interest due to the longer loan period, in turn putting the security of your home at risk if you run into payment difficulties further down the line.

4. Consider debt review carefully

Debt review is a significant step and should not be taken lightly. Understand that once you’re in debt review, you cannot obtain any new credit and you cannot exit the process until you have settled all your debts (with the exception of your home loan).

That means that even if your circumstances change in a few months’ time and you are once again able to resume your regular payments each month, you cannot exit the debt review process until all the debt is paid off. During the time – which can be up to five years – you cannot get any credit. Your only option is to pay the debt faster to shorten the period in debt review.

If you see no other way clear, engage with a reputable and professional debt review agency that will clearly explain all the implications of this process to you beforehand. There are also costs attached to the debt review process, which you will need to pay upfront.

5. Reduce discretionary spending

Cut back on non-essential spending, such as entertainment, eating out and subscription services.

Focus on budgeting and prioritising necessary expenses only. Be ruthless in prioritising what the absolute necessities are and cutting all discretionary spending until you get back on your feet and out of the red.

6. Check for credit insurance

If retrenched, check if you have credit insurance on loans and credit accounts. This can cover repayments for up to 12 months.

7. Protect your credit score

The better your credit score, the less expensive your debt repayments will be on future credit as you’ll qualify for the best possible terms and interest rates, due to your lower risk to the credit provider.

This is why it is so important to engage with a credit provider or collections agency if you find yourself unable to honour your debt repayments and to put a new payment plan in place. This way you prevent your outstanding debt from going into the legal recovery stage, which is the point at which it can have a lasting negative impact on your credit record and score. –IOL