Living completely debt free is a near impossible challenge in the South African economy. Some debts such as a mortgage or vehicle finance are inevitable, and as long as they remain manageable they should pose no problem to a consumer. However there are other debts that consumers are increasingly turning to that are subject to high interest rates, sudden increases in minimum payments and heavy penalties for late payment. These are known as bad debts.
The first step to avoiding bad debt is to leave the credit card at home. Having it with you is just a temptation to spend money that you do not have. A credit card should be considered in extreme emergencies only, as the interest rates attached to credit card repayments are exceptionally high.
Secondly avoid store credit at all costs – if you want to purchase a luxury item, save up for it instead of buying it on credit. At the end of the day consumers can pay nearly double the initial amount if they purchase something on store credit. Wait for sales to buy from expensive stores.
One of the biggest debt pitfalls is short term loans and pay-day loans. Often times in a financial emergency consumers turn to these lenders in order to cover immediate expenses, hoping to rectify the situation in the following month. However the problem is that these types of debt start a cycle where the consumer becomes increasingly dependent on debt in order to pay debt. In the case of a financial emergency it is better to look for other avenues of income such as selling off luxury items. Always put away money in an emergency fund in order to be prepared for a financial emergency.
Avoiding debt is easy if a consumer differentiates between good and bad debts, and always stays away from bad debts. There is no need to incur debt for items that could be saved up for in a few months.
Article written by: Andrea van Tonder 06-2013