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South Africa's best financial advice, research, how-to's, and insights 1

3 Ways to Get Out of Debt and Live to Tell About It

Man struggles while he tries to balance debt and income

Salary not quite cutting it. No savings. And a hefty debt instalment at the end of every month. Is debt stopping you from doing the things you’ve always wanted? It might be time to face the music, put on a brave face and tackle them head-on. Find out which method will work best for you…

If you are like the majority of South Africans, you have debt.

Credit cards, personal loans, store cards and overdrafts…

Is it stopping you from reaching those big life goals? Do you want to buy a house? Save for retirement? Maybe you want to start a family or take that once in a lifetime holiday abroad.

If you have too much debt it can be difficult to achieve these goals.

It’s time to work through it.

Even if your debt is manageable, it may be still costing you more than you personally feel comfortable with every month. You just want more financial freedom.

Paying off debt requires dedication and hard work. If you’re sick and tired of large chunks of your salary going to pay off debt every month, then the sacrifice is worth it.

How you tackle it, depends on how much debt you owe vs how much you earn…

 

Know your debt-to-income ratio (DTI)

Your debt-to-income ratio is the percentage of your monthly salary that goes into your monthly debt repayments. Your monthly debt repayments include rent/mortgage, cell phone contracts and any other type of repayment commitments you may have.

To calculate your debt-to-income ratio, add all your monthly repayment commitments and divide them by your gross monthly income.

Monthly Debt Repayments / Gross Monthly Income x 100 = DTI %

 

Why does it matter?

Have you ever been refused credit and you don’t understand why? It may be because your debt-to-income (DTI) ratio is too high.

Your DTI is often used to measure your ability to repay your debt. Credit providers use your debt-to-income ratio to determine how much you can borrow (if anything). And how much interest you will be charged. Each lender has their own DTI criteria in line with what the law allows.

What’s your debt-to-income ratio? And what’s the best way for you to get out of debt?

There are only two ways you can reduce your DTI:

  1. Increase your income
  2. Reduce your debt

 

LOW RISKSOLUTION
When your debt repayments make up 20% or less of your salaryTake a DIY approach to getting out of debt. Try using various debt repayment methods like the Avalanche method or the Snowball method. Lower your monthly expenses. Or find a way to bring in an additional income.
MID RISKSOLUTION
When your debt repayments make up 20% – 40% of your salaryIf you have a large amount of unsecured debt, try and tackle your largest accounts first. For example, if you have a credit card with a high balance and interest rate, see if your eligible for a loan with a lower interest rate. Use the loan to settle your credit card and close the account.
HIGH RISKSOLUTION
When your debt repayments make up 40% or more of your salaryLook into debt relief options. If your debt repayments and living expenses outweigh your monthly income you may end up facing legal action if you miss payments. Look at an effective alternative option such as debt counselling to lower your monthly repayments while protecting your assets.

If you’ve received a Section 129 letter where legal action is imminent, contact a debt counsellor immediately.

 

Get out of debt option for LOW RISK

When your monthly debt repayments make up 20% or less of your monthly salary.

Stop using your revolving credit (credit cards, store cards and your overdraft). Take out all your credit cards and store cards and burn them. Ok, you don’t have to be that extreme. But the point is to remove all temptation. Maybe just freeze your cards in a big ice block. After some intensive chipping away at it, you might not be so tempted to use it anymore.

Then reduce your living expenses. Divide them by essential, non-essential and luxury.

Non-essentials are things you can cut back on. Do you really need a takeaway twice a week? There are delicious takeaway recipes you can make at home, for half the price. Or bring your lunch to work instead of buying snacks at the vending machine or office canteen.

Luxuries are a definite no until you’re back on your feet. Monthly cosmetic services, club memberships and so forth will only make it harder to get rid of your debt.

Get out the Debt Avalanche method and the Snowball method.

 

Get out of debt option for MID RISK

When your debt repayments make up 20% – 40% of your salary.

Sometimes cutting back on non-essentials and removing luxuries won’t make much of a difference.

Tackle debts with the highest interest rates first and the largest balance.

Contact the credit providers of your accounts and try to deal with them head-on. Or alternatively, pay off these accounts and close them with a low-interest personal loan.

 

Get out of debt option for HIGH RISK

When your debt repayments make up 40% or more of your salary.

If you’re using credit to buy food and pay your bills, then it’s time to act now. If left, it could end up costing you your home, car, and sanity.

Debt counselling was formally introduced to help consumers who are struggling to live due to debt. The process protects you from credit providers taking legal action after you have applied.

Your debt counsellor will negotiate with credit providers to lower your monthly repayments while making sure you have money left over every month to pay for the things you need.

 

Financial freedom

Financial freedom means not being weighed down by debt every month. It means having money to add to your retirement fund, or even just being able to save for an amazing holiday. If you don’t have money left at the end of the month because most of it goes into debt repayments, take action today.

Find out where you stand and if you are high risk and over-indebted, get in touch with Debt Rescue. We’ve helped thousands of South Africans get out of debt.

Need immediate financial help?

Thank you!

We look forward to the opportunity to get you debt-free!