Themba has five steps that Sophie should follow to get out of debt.
STEP 1: KNOW WHAT YOU OWE
You need to know and research all of your debt.
Facing your debt means that you know exactly what you owe (think about
the Secret of the Elephant). You also need to know what it costs you to
have the debt and what interest you pay on the different types of debt.
Finally, you need to find out how many repayments you still need to make
and if there are costs involved in paying off your debt early. This
knowledge will help make it easier to decide which debt needs to be
charged down first.
Themba asks Sophie for a summary of all her debt and creates the tables
below:
| Debt | Amount Outstanding (without interest) Z$ | Interest Rates | Monthly Repayment (with interest) Z$ | when will it be paid in full |
|---|---|---|---|---|
| ABC Appliances – TV | 600.00 | 10% per year | 205.00 | 3 months |
| Loan (Chimbadzo) | 1800.00 | 25% per year | 337.50 | 6 months |
| Clothing Account | 1200.00 | 20% per year | 220.00 | 6 months |
Sophie’s loan is very expensive. Over six months at 25% interest, she will pay the full amount of ZWL2025 which is ZWL225 in interest alone.
Now let’s list all of your debt, remember to include your home loan, overdraft, hire purchase contracts, credit cards, store cards, bank loans, family loans, and any other debt you have. It all adds up!
STEP 2: GET THE HELP THAT YOU NEED
You will need support from your family and friends to charge down your debt. Share your debt problems with people who you know will keep you motivated and on track to charge down your debt.
STEP 3: ADJUST YOUR BUDGET
Update your budget so that you can see how much extra you can pay towards your debt. You may need to cut back on wants until your debt is paid off
STEP 4: CREATE STRATEGIES TO DEAL WITH YOUR DEBT
Charge down the most expensive debt first
Charge down your debt the way a rhino charges down a threat. Your biggest threat is normally the debt with the highest interest rate. If you are behind on any debt repayments these should be paid off first. This could be for a house, car, furniture or loans. Your biggest threat is when you fall behind on payments and you risk your goods being repossessed. If this happens then you have nothing to show for all the money you have already paid. Look at all your debt and prioritise
Consider selling your valuables
Do you have any valuables you are not using that you could sell to repay your debt? This could be a first step to becoming debt free. Don’t sell anything you will need to replace at a higher price in the future.
What if you are blacklisted?
If you don’t manage your debt properly and pay your accounts on time, it could negatively impact your credit rating. It could make it difficult to secure more credit in future and also affect the prospect of you getting a job. Companies check your credit report and your payment history. You may be blacklisted and will not be able to get any more credit, and your current creditors can take back (repossess) what you bought from them to cover their costs.
The blacklisting at the credit bureau lasts until the debt has been paid and your name has been cleared with the creditor. If you are blacklisted, you can get a copy of your credit report from the credit bureau and check if is correct. You can contact your nearest credit bureau and check the report. If there are any errors, you must let them know and they will investigate it so it can be rectified.
Work out a payment plan
It is better to let your bank and creditors know that you cannot pay them than to just miss the payment. You need to explain your situation to the creditor and ask if there is a possible payment plan. Most creditors are willing to make a plan if you contact them early. They would rather collect what they are owed slowly than not at all. Remember this would be a temporary measure until you are in a better situation. You will still need to repay your original debt.
Debt consolidation
Debt consolidation is when you get a loan to cover all outstanding debt with multiple providers so that you end up paying one amount to one provider.
Although this is an option, it does have its own risks because you still have the same amount of debt to repay even though you are making one payment instead of many. You still need to pay off your debt as quickly as possible.
CALCULATING THE IDEAL DEBT-TO-INCOME RATIO
How much of your take-home pay is used to pay off debt? Let’s work out what Sophie’s debt ratio is.
Total monthly debt = ZWL700.00
Monthly take-home salary = ZWL3 500.00
Ratio = debt/income = 700/3 500 X 100 = 20%
Themba is happy. This level is below 30% but still says that Sophie needs to be careful about the cost of the debt she has. He also reminds her that she overspends every month, so she needs to decrease her expenses.
What is an acceptable debt percentage?
No more than 30% of your take home pay should be used to service debt. This is an acceptable debt percentage if you want to achieve financial security.
Themba explains what a debt-to-income ratio means:
| % of income used for monthly debt repayments | what it means |
|---|---|
| 0 – 30% | Mostly responsible with money. Debt is under control and you are in the process of charging down your debt. |
| 30 – 36% | Heading towards danger |
| 37 – 50% | Danger zone. Debt is out of control and needs to be reduced fast |
| Above 50% | Debt requires immediate action. Debt is out of control and you could end up in serious financial difficulty |
STEP 5: NO NEW DEBT
Themba says to Sophie that she needs to stop incurring new debt.
He tells her how she can stop incurring new debt:
Think before you buy
Themba says Sophie must ask herself the following questions before she considers any new debt:
Say no to new debt!
The hardest part in charging down your debt is resisting the urge to take on new debt.
This will require sacrifice, commitment and motivation. Remove temptation by destroying your credit/store cards to prevent impulse buying. You need to challenge your old habits and develop new ones.