Bank Better, Live Better
5 signs of a credit problem
Borrowing money can be handy, but sometimes you can have too much of a good thing. Here’s how to tell when it’s time to take control of your credit.
Credit is a great way to help you get ahead. For example, consider how a loan used to buy a car can improve your life – it gets you to work, gives you freedom and saves you time. But if you don’t manage credit correctly and can't keep it under control, it can have a negative side.
Here's how to tell when it's time to take control of your credit.
Sign 1: Too much of your income goes to paying off debt
Credit providers use your debt-to-income ratio to work out whether you can afford more debt. You can work it out for yourself to see whether you’re taking on a heavier financial load than you can handle. To work out your ratio, you need to divide your debt by your gross income. For example, if your monthly debt is R20 000 and your monthly gross income is R30 000, your debt ratio is high at 67%. A high debt ratio indicates that you need to reduce your debt, while a low debt ratio gives you a greater chance of being given access to loans or credit.
Sign 2: You can’t keep track of how much you owe
People who are in control of their finances have a good idea of how much they owe, and who they owe. Not having a clear idea of this could be an indication that you've taken on more credit than you should have. If you fall into the latter group, and want to change the situation, start by creating a detailed and accurate money plan – this will give you a clear picture of where you stand financially, and you can then take steps to tackle your debt.
Sign 3: You borrow money to pay off debt
Do you have to borrow money from friends or family because you don’t have enough to pay off your debts? Or do you use credit from one credit provider to pay off another (in other words, you take on new debt to pay off older debt)? This can get you into a deeper debt cycle that will be difficult to get out of.
Sign 4: You avoid your creditors
If you avoid opening your emails or letters from creditors because you're too scared to face the reality of how much you owe, then it’s likely that you’re spending more than you can afford. Ignoring letters of demand or requests for payment will only make the problem worse. Instead, you need to take a realistic look at your financial situation, listing your expenses and possibly cutting out some luxuries you can live without.
Sign 5: You hide it from the family
Do you hide recent purchases from your nearest and dearest, or avoid them because you’re worried about what they’ll say about your spending habits? Buying nice things should be a happy experience – and you can do this guilt-free if you’ve worked out your money plan, knowing that you can afford them.
If any of the above points apply to you, then it’s time to take action.
- Get a free copy of your credit report, and use this information to work out an accurate monthly budget
- Know what you spend your money on and always ask yourself if it is a need or a want. A need is something you can't live without, while a want is a nice-to-have. Be honest with yourself
- Speak to your credit providers about the fact that you’re having difficulty making payments, and see whether they can come up with an alternative payment plan, or whether they can help consolidate your debt so that you simplify your debt repayments
- Prioritise paying off the debt with the highest interest, as well as debt that you might be close to paying off
- Only take on debt that you can comfortably repay on time with your income, and not with money from another source
Download our Good for Credit Booklet.
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