Knowing how much debt is available to you and how much you can afford to repay each month is important. Many South Africans take out new loans on a monthly basis to cover shortfalls or repay other debts, without considering the impact this may have.

How do you know when you have reached your credit limit? 

Your credit limit is the maximum amount of credit available to you.. There are many different types of debts. Some examples are credit cards, loans, vehicle finance andstore accounts. In many cases, a credit provider or financial institution will set credit limits based on specific criteria, which includes their method of calculating your affordability. 

They will also use your credit score to understand your credit worthiness. If you use more than your credit limit and start missing payments and falling behind, it can lead to your credit score being affected. This can cause credit providers and financial institutions to reject your request to loan money. 

When your new loan applications start being rejected, it may be because of your repayment behaviour or because you have reached your credit limit. If your debt repayments are taking up more than 50% of your net salary, you have already used a significant portion of the credit available to you.

How do you know if debt is good or bad?

The answer to whether debt is good or bad is not straightforward. However, when used wisely, debt can be good if it has a positive impact on improving your overall financial net worth. For example, if you purchase a home or apartment and choose to take out a home loan. With the debt you created, you are purchasing an asset that may likely appreciate over the years. It can also be used to generate rental income.

With the case of bad debt, there are quite a few examples we can use. Bad debt can be considered to be payday loans, personal loans, store accounts, credit cards and overdrafts that are used to purchase everyday essentials or luxurious items These debts can negatively impact your financial health and cause you to fall into more debt or become over-indebted. The reason being is that you are paying way above market value due to interest and fees charged.

What alternatives are there instead of using debt?

Consumers rely on debt to cover emergency expenses, shortfalls in their monthly budget or, in many cases, for luxurious spending. However, there are a few alternatives you can explore instead of utilising debt. 

1. Save some additional money (if you can) each month. When an unexpected emergency arises, you can pay for it out of a savings account. However, with a savings account, you should  be prepared to repay the full amount back into the account at the beginning of a new month or set up a timeline of how much you are able to contribute towards it. 
2. Set up a 24 hour notice investment account with your bank (if applicable). With an investment account, the contributions you make each month will benefit your overall financial goal. Investment accounts are based on compound interest, which means your contributions grow on a money basis. With more contributions to the account, your money will grow each month. 
3. Consider a debt solution that helps you control your debt. In certain circumstances, reducing your current debt repayments will open up cash flow which means you do not have to use debt. A formal solution such as debt counselling can assist with this.

How much is too much debt? 

If you are utilising more than 45% of your household income to service (repay) your debt each month, this likely means that you have too much debt. In the ideal situation, your income should service no more than 36% of your income each month. Additionally, rent or home loan payment should not account for more than 28%.

South Africans are now spending over 75% of their take-home pay on debt. Research shows that around 84% of South Africans are not able to make ends meet month-to-month and 80% resort to expensive unsecured loans such as those offered by illicit mashonisas.”

Source: South African Reserve Bank

What happens when you have too much debt?

If you are struggling to repay your debt each month, you most likely have too much debt. If you have too much debt and are at risk of missing repayments, you may be in a bit of financial trouble. Multiple missed payments can lead to defaults or judgements on accounts. With your credit score being affected, you may find it difficult to apply for other types of debts such as a vehicle finance or home loan. Additionally, lenders may reject any personal loans or credit card applications.

What debt solutions are available?

There are a few formal debt solutions available to South African consumers that can assist you in reducing your monthly instalments and, in some cases, interest rates to a more affordable amount. There are two forms of debt consolidation currently available to South African consumers, and these are formally known as;

1. Debt Consolidation Loan – this is essentially a lump sum loan that is used to pay off debt. This results in you only having to repay one instalment each month. However, there are strict industry requirements that need to be met in order to qualify. Interest rates on these loans are typically high due to the risk profile associated with this product.
2. Debt Counselling – this is a legal process whereby the debt counsellor can renegotiate your instalments and interest rates with your credit providers. This can reduce your monthly instalments to a more manageable and affordable repayment. In this process, all your debt is consolidated into one payment. With debt counselling, those who are over-indebted can qualify for this rehabilitation product. 

If you are currently struggling with debt, and looking to consolidate your payments, contact us for more information. Our debt experts will guide you through one of our free financial assessments. They can also provide you with some tips on how to improve your credit score.