Effective credit management

How to formulate a debt repayment schedule and stick to it

The rising cost of living, compounded by substantial fuel hikes and soaring interest rates have placed many consumers under increasing financial pressures this year. In light of the increasing household debt-income ratio, South Africans would undoubtedly benefit from taking a critical look at their spending habits. In addition, they should also work on developing a routine that involves healthy financial habits. Ultimately the best financial practice is to pay for purchases with saved cash.

However, this is not always practical and utilising credit can be a convenient way to afford larger purchases and smooth cash flows. Managing credit obligations is one of the most important budgeting practices and involves putting together a debt repayment schedule. This schedule will allow consumers to keep their credit spend and repayments in check, even in times of financial difficulty.This is the opinion of Marine van Brakel, Chief Operations Officer at RCS who says that: “Holistic budgeting is about taking practical steps to avoid falling into the vicious cycle of over-indebtedness. While credit may provide much-needed relief in times of financial constraint, ensuring good credit health is the cornerstone of ensuring financial wellness.

Some may find the concept of drawing up a debt repayment schedule to be daunting, but all it takes is a few simple steps, some strategic thinking and self-discipline. The good news is that anyone can do it.”

Start with the all-important list

Advocating for an approach to debt management that “gets back to basics, van Brakel urges South Africans to start their debt repayment schedule with the simple task of making a list of all their outstanding and upcoming debts.

The list should include the amount of money owing as well as the current interest rate being charged on that debt by each respective credit provider. It may be useful to list these debts in a table format, arranging them in order of size, starting with the smallest debts first. The list should include all debts, including money owed to family and friends, as well as more formalised forms of debt such as student loans, mortgages, personal loans and store credit.

“We are often surprised by how many South Africans do not know how much interest they are being charged on their credit facilities. The simple task of enquiring about what the applicable interest rates are and getting it down on paper can be immensely empowering. Having your list of debts in a consolidated, tangible format will help to expel some of the anxiety that may be associated with being in debt. This will also provide consumers with a solid foundation for a realistic plan of action,” says van Brakel.  

Be consistent about making payments

Once the list of debts has been drawn up, van Brakel recommends starting by paying off the smallest debts first. These “small wins” will help you feel more in control of your financial wellbeing. It will also provide you with a sense of accomplishment as you work your way to paying off your larger outstanding amounts.

An alternative approach would be to make consistent payments against the credit facilities that have the highest interest rates. This will help you avoid accumulating unnecessary large amounts of interest over time. The rule of thumb when paying off debts is to always pay the minimum amount due, but where possible, try to pay more than the required instalment.

Review how you spend your income

The next step in formulating a debt repayment schedule is to set up measures that will help you manage your cash flow more effectively. This can be done in two ways: find ways to earn extra income or see where you can reduce your monthly expenses. A good financial practice is to allocate any extra income in the form of tax rebates and bonuses to paying off your debt, rather than spending it on nice-to-haves.

“Think of any extra income you may earn or any unplanned income in the form of gifts as being ‘debt deposits.’ Many South Africans fall prey to the debt cycle by planning how they will spend their bonuses and tax rebates before the money enters their bank accounts. Instead of doing this, make a conscious decision that any extra income will be allocated to debt repayment for at least one year. Remind yourself that this is a short-term solution that will change in the long term and will have a positive impact on your financial well-being in the future,” says van Brakel.

One debt at a time

The next step is to focus on one debt at a time while trying to pay slightly above the minimum amount on all your debts consistently every month. Trying to tackle all the debts on the list at the same time can be overwhelming, but when focusing on one debt at a time, you can manage that specific debt more effectively.

As van Brakel concludes: “With credit, less is more. Each line of credit comes with a cost so it is important to keep credit to a minimum. Using a debt repayment schedule to manage debt may be a simple task that can make a world of difference. At first, the list of debts may seem insurmountable but as you manage these amounts one debt at a time, you gain momentum. Additionally, your confidence will grow and you will succeed at minimising the financial pressure you may feel. Taking these proactive steps can have an overwhelmingly positive impact on your self-esteem and peace of mind.”

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