Borrowing carefully as part of a bigger plan is not a bad thing

Debt itself is not a bad thing, if you can borrow carefully as part of a bigger plan, such as a mortgage on a house. This means you will save on rent and ultimately own your house that will increase in value over time.

But credit is easily available and many people tend to get into debt without thinking about the dangers and pitfalls.

Debt is the biggest threat to your future financial security and the only way to get into debt is to face it and deal with it. The good news is that anyone can reduce debt over time, but it takes discipline.

Are you a debt ostrich?

Are you in debt but afraid to face it? Do you:

• Always feel guilty about your debts?
• Struggle to sleep at night because your debts worry you?
• Feel overwhelmed by your debts?
• Ever “borrow from Peter to pay Paul”?
• Ever refuse to take your creditors phone calls?
• Ever receive threatening letters from your creditors?
• Know the interest rates you are paying on your debts?

Debt and interest

Always ensure you know what interest you are paying. If you borrow money, you need to pay for the use of the money. This is called interest, and is given as a percentage. The faster you pay back your loan the less interest you will pay and the less your loan will have cost you.

Different types of lenders charge different interest rates. Banks will probably have the most reasonable rates while micro lenders can charge whatever interest they like (provided they disclose it to you). This can often be as high as 30% interest per month, making the amount you pay up to four or five times the actual amount of your purchase.

Get out of debt

Getting out of debt requires a change in attitude and serious commitment. You need to learn how to make sacrifices in the short-term to free yourself in the future.

Analyse your debt:

• How much do you owe?
• How much are your monthly repayments?
• What interest are you paying?
• Which debt is costing you the most?

Deal with your debt

Stop hiding and find practical ways to deal with your debt:

• If you have a homeloan consider consolidating all your debt in one account at the lowest interest rate available to you.
• Identify which debt is the worst in terms of interest or potential blacklisting.
• Identify areas where you can cut back and then prioritise your debt so that you can pay the extra cash to that creditor.
• Call your creditors and discuss your debt with them. Tell them you are struggling at this time but have a plan for repayment. You will find that many creditors will be happy to discuss your plan.
• Get extra part-time work.
• Stop getting into debt and learn to live within your means.

Get advice and support

Find someone you trust to help and support you. Consider contacting an Old Mutual Financial Adviser who is a trained professional and will offer you expert advice.