Let’s answer the “how to pay off debt” question

When you find yourself in a debt trap, it can feel impossible to get out of it. But there are always options, from budgeting better to understanding how to apply for a debt consolidation loan.

Bad debt is a bad partner to have, whether you are single, in a relationship, or have a family. This, the month of love, is a good time to break up with bad debt and commit to healthy money habits.

The first step is to fully understand your debt situation. Your credit report is an extremely handy tool to do this. This document contains everything you need to know about all your loans and accounts, and your payment history on each of them over the past two years. By studying your credit report, you will quickly see exactly how much debt you have, how much you owe which credit provider, and whether or not you have missed any payments.

Next, you should decide whether you actually need all the loans and accounts you have. For example, is there value in having clothing store accounts when you also have a credit card? Remember, each account has fees and charges associated with it – money you can and should spend better.

Settle in full and then close old accounts or those you no longer need. You will save some money and your credit score will benefit from you having fewer accounts.

Even when you can repay all your debts every month, ask yourself if that’s the best use of your money. There is far more value in saving and investing money, or paying more on your home loan,  than in paying off a credit card or other short-term debt.

To help you in this thinking process, calculate how much of the debt available to you, you currently use. For a healthy credit score, you shouldn’t use more than 35% of your available debt. To put it simply, if you qualify for a R100 loan, you should not take on more than R35.

Armed with this information, rethink your budget and allocate more money to paying off debts quicker so that you can free up cash flow and increase your monthly savings.

Now, if you are over-indebted and struggling to pay your debt instalments, your best course of action is to consolidate your debt.

Start by contacting all your credit providers and ask them what discount they are prepared to give you in exchange for you settling your debt in full. Depending on how much you owe and how badly in default you are, you could get settlement discounts of at least 10%.

When you have negotiated a settlement discount, make sure that:

• The creditor gives you a settlement letter on a company letterhead.
• The settlement letter gives the account details for the settlement payment.
• You get paid-up letters or statements from the credit providers that have been settled so that you can be sure those loans have been closed.

Once you know what the final settlement amounts on all your accounts will be, add them all up to see how big a consolidation loan you need. You can also arrange with a credit provider (such as Bayport) to negotiate settlement discounts on your behalf and give you a quote for a consolidation loan.

When you consolidate your debt, you get several benefits:

• Your debt is easier to manage. One instalment is easier to keep track of than several.
• Your debt costs you less. You no longer pay interest, costs, and fees on many loans.
• You will save because the consolidation loan’s interest rate is likely to be lower.
• Your monthly cash flow improves because your consolidation loan repayment will be lower than the combined total of several repayments.
• Your credit profile will improve over time as a result of having settled a number of loans. Also, consolidation loans are not listed at the credit bureaus, although the loan itself will reflect on your credit report.

Similar to breaking up with a lover or partner, breaking up with bad debt can be more difficult than you think.

To make sure you don’t fall back into your old ways, follow these three tips:

• Stop using credit cards or any other accounts that were settled by the consolidation loan. The best advice is to close the accounts and cut up the credit cards.
• Be disciplined with your money and do not borrow again. As soon as you have paid off your debts, creditors will be ready to offer you loans again – do not fall into the same trap.
• Keep improving your financial knowledge and keep implementing and following healthy money habits.

While it is true that becoming debt free is not quick and easy, how to pay off debt can be an easier question to answer than you think (or fear).