Killing that credit card debt

Maya Fisher-French
2020-03-20 14:15
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Cutting the card There are many ways to cut the credit card, with the most important step trying to find out how much you owe. Picture: iStock

For this year’s Money Makeover contestants, credit card debt was a major challenge. They have worked with their advisers to find innovative ways to settle that card debt.

However, the only guarantee of long-term success is to stop using your credit cards, unless they are paid in full at the end of each month.

You can follow the journey here:

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Finding extra cash in the budget

By making some basic budget adjustments, TV producer Nono has tackled her credit card debt. With the help of her financial adviser Steven Williamson, she uses her monthly budget more wisely and has already reduced her credit card debt from R6 500 to R1 500 in three months.

“You must understand it is not that I suddenly had extra money, it was just using the money I already had in a better way!”

Construction entrepreneur Bellah is currently paying R2 000 a month to try to settle her personal credit card and will use a large payment due from a client to settle the debt rather than going on a spending spree which she would have done in the past.

The only way to settle your credit card debt is to stop using it. Commit to putting as much money as you can into the card. The minimum instalment barely covers the interest and keeps you indebted forever.

Consolidating credit card debt into a personal loan

If Mishack takes the personal loan and increases his repayment to R4 000 a month, his debts will be settled within three years
Absa adviser Johan Frouws

Government communicator Mishack’s credit card debt ballooned until it was worth several times more than his monthly income. He could only afford to pay the monthly minimum amount of R3 300. In analysing his payments, he discovered that more than half of the R3 300 monthly instalment was going to service interest.

Credit cards are a revolving credit facility, you can never set a specific date as to when they will be paid off. Absa adviser Johan Frouws recommended a personal loan to settle the credit card.

A personal loan can provide a lower interest rate and you have a set date as to when that debt will be settled.

“If Mishack takes the personal loan and increases his repayment to R4 000 a month, his debts will be settled within three years. At his current rate, he would not have settled even half of the outstanding credit card debt by then,” says Frouws.

Mishack has also committed to use his bonus to pay off some of the loan. It is important to note that even if you take out a term loan, you can settle it before the period without any penalties.

In order to consolidate debt, you need to have a reasonable credit score. So this is something you should do before you start to default.

Tips to pay off your debt

Know your debt situation

We often only focus on our monthly instalments, ignoring the value of our total debt and interest. Area manager Colen was surprised to discover the extent of the debt he had taken to fund his property expansion.

“I was happy with paying the instalment, it was only when I saw the total debt I had, and the interest, I realised what it really cost me,” says Colen.

He is now taking the money he was leaving in his transaction account to pay towards his property debt.

Target each payment

A good start is to focus on the smallest debt first. Once that is paid off, you take the instalment and add it to the next debt. This is known as the snowball effect.

Or you can look at those debts that are costing you the most money. Colen is focusing on reducing the personal loans he took out on two of his properties.

As the personal loans are more expensive than the mortgages, it makes sense for him to target these first.

Use rate cuts to accelerate debt repayments

One upside of a weaker economy is that the Reserve Bank is expected to continue to cut interest rates.

By requesting your bank to maintain your original repayments you can reduce the length of your loan.

Colen has used the recent rate cut to pay extra money into his mortgages.

For every 0.25 percentage point cut, you can reduce your home loan by one year!

Cash in an investment

Consultant Peter relied on his credit card to meet the shortfall in monthly expenses since he was no longer earning a corporate salary.

“We tried to accelerate payments, but there was no wiggle room in the budget to do this,” says Peter.

On his Absa adviser’s advice Leighanne Decker, Peter reluctantly cashed in an investment to pay off a large portion of credit card debt and he then diverted the rest to start an emergency fund.

Although a last resort, Decker argued that his investments had delivered a negative return while the interest he was paying was far greater than any potential return. The R5 000 that was going to his credit card will now be used to cover the shortfall in their household budget.

Cashing in an investment to pay credit card debt should be a last resort

Mishack is also considering selling some cattle to settle his debt. Currently, all cattle auctions have been put on hold since there has been an outbreak of foot and mouth disease.

Cashing in an investment should be a last resort. This was only an option for Peter as the significant cut in his salary has left the family short of cash each month despite the severe budget cuts.

Peter will have to postpone retirement. He also needs to ensure that he does not go back into debt and starts investing as soon as possible.

Using your mortgage to consolidate

Catherien’s husband Jan built up significant credit card debt to provide cash flow for his gunsmith business. The client defaulted on payment and put the couple under enormous strain as Jan is unable to cover the household budget.

A business strategy is being put in place to ensure he does not rely on credit cards for business cashflow. However, they will have to utilise funds from their mortgage to settle the debt.

Once their finances are back on track, they will increase the mortgage payments to ensure the card debt is settled as soon as possible and not over the 20-year home loan period.

While it may be tempting to dip into your mortgage, you need to be aware of the long-term consequences

Peter previously used his mortgage to buy a car. While the intention was to pay the equivalent in car finance into the mortgage, with the change in their financial circumstances this did not happen. Peter is now making a nominal payment of R1 000 into the bond to accelerate the debt repayment.

While it may be tempting to dip into your mortgage, you need to be aware of the long-term consequences.

A R20 000 credit card debt paid off over 20 years would cost you R26 000 in interest. You must increase your bond repayments so the debt is settled over a shorter period.

Know your debt situation

We often only focus on our monthly instalments, ignoring the value of our total debt and interest. Area manager Colen was surprised to discover the extent of the debt he had taken to fund his property expansion.

“I was happy with paying the instalment, it was only when I saw the total debt I had, and the interest, I realised what it really cost me,” says Colen.

He is now taking the money he was leaving in his transaction account to pay towards his property debt.


What the Money Makeover challenge is all about

Follow six South Africans as they take up the Absa and City Press Money Makeover Challenge and undergo a money makeover boot camp over the next six months.
Each person has been allocated an Absa financial adviser. The candidates will be required to complete certain financial tasks and stick to the budgets set out for them.
Personal finance expert Maya Fisher-French shares their stories.

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