Debt management

Here a few tips brought to you by Absa to help you manage your debt.

SPONSORED - Credit is a great tool, but you need to stay in control of what you owe.

Here a few tips brought to you by Absa to help you manage your debt.

1. Manage your monthly budget effectively

Drawing up a monthly budget is a great way to create financial freedom. Here’s a few benefits of having a monthly budget:

  • It helps you to identify your long-term goals and put a plan together to achieve them.
  • It assists you to not spend money that you don’t have by showing you exactly what you earn, how much you can afford to spend and how much you need to save.
  • It prepares your finances for retirement by creating a structure of saving for long-term goals when you aren’t earning an income.
  • It helps you to build an emergency fund which should be a fund of between three and six months of living expenses to help you mitigate a life crisis such as a lack of employment.
  • It identifies bad spending habits that you can minimise to save money.

2. Understand your costs of credit

Before your swipe your card, you should know when you are able to repay. If you are not using a 57-day interest-free period, interest will be payable on your purchase, for which you will need to budget. Determine if you can afford to buy the item at its cost plus the interest.

As with any debt, it is important to stay in control which also helps you to build a great credit profile. Stay within your limit, and be aware of how your use of your credit card affects the amount you need to repay each month. If at any stage you feel that the limit on your credit card is far too tempting, simply reduce the limit to one which you know you can afford. Simply call the number at the back of your card to reduce your limit.

3. View your credit report once a year

Debt has a ripple effect across your entire financial life, including your credit score and you need to be aware of your current credit score. A credit score is a rating which evaluates your creditworthiness. This information is used to determine the probability that you will be able to afford and pay back credit that you’re granted. Credit scores are calculated based on your past behaviour with loans, credit cards and other financial products and you can get a free credit report once a year at www.transunion.co.za.

If you’re an Absa transactional customer, you can get a mini-credit report on WhatsApp Banking if you’ve got an Absa transactional account, on menu item 9. Remember, if you carry a high balance compared to the credit limit on your credit card from month to month, it will likely have a negative effect on your credit score — especially if you’re doing it with multiple cards.

4. Debt strategies

If you’d like to become debt-free, there are two ways of doing this, but ensure that before you use one of these strategies, you have sufficient funds for both your living expenses and emergencies that may come your way:

  • Debt snowballing

This strategy involves you starting with paying down a small credit product you may have with the smallest balance, like a short-term loan, while repaying the minimum balance due on your other credit products. The benefit of this approach is that once you have repaid a smaller amount of debt, you have built up confidence to tackle larger debt as you have moved the smaller debt out of the way.

  • Debt avalanche

In this debt strategy, you choose to focus repayments on the debt you have with the highest interest rate while paying the minimum balance due on your other credit products. The benefit of this approach is that you are minimising the amount of interest that you are repaying, resulting in a reduced period of time to repay your debt.

Life is unpredictable and tough times could leave you struggling, but we hope these few tips will help you stay in control.