"The accumulation of debts is a most fearful evil" - Thomas Jefferson. The concept of debt is frequently associated with negative connotations; however, it is not inherently detrimental. When utilized judiciously, debt can serve as a valuable instrument for wealth accumulation. For instance, borrowing funds to invest in opportunities such as real estate, initiating a profitable enterprise, expanding an existing business, or acquiring stocks can result in property appreciation and income enhancement. In contrast, debt that is incurred to purchase non-appreciating assets or those that do not generate income is categorized as "bad debt." Such liabilities can present significant challenges regarding repayment. Various motivating factors lead individuals to borrow money or engage with Buy-Now-Pay-Later services, encompassing auto loans, mortgages, salary loans, student loans, and business loans. The prevalence of consumer loans has increased, offering convenience and assisting in the fulfillment of immediate household or personal requirements. In the field of economics, consumer debt is generally utilized to finance consumption rather than investment. This type of debt encompasses personal loans aimed at facilitating the acquisition of goods and services for individual or household use. The benefits of consumer loans are notable, as they provide prompt access to essential items and services, particularly in urgent circumstances. Nevertheless, if consumer debt is not managed effectively, it can escalate into an overwhelming burden, resulting in significant financial and mental health challenges. Individuals often experience financial distress, anxiety, and depression when attempting to navigate the repayment of their debts. Fortunately, there are empowering ways to tackle personal debt and rise above the weight of financial challenges. 1. Make a List of Debts: A crucial step in managing debt is to create a comprehensive list of what you owe. Understanding your debts and to whom you owe money is essential for effective repayment planning. To assist with this process, obtain your Credit Report, which provides details about your credit activity and current financial status, including your payment history and the status of your credit accounts. Gather as much information as possible about your debts, ensuring that you include items such as rent arrears, money borrowed from friends and family, utility bills, and credit card debts. This thorough approach will help you have a clearer picture of your financial obligations. 2. Prioritize Debts to Start Repaying: When managing your debts, it is important to prioritize them based on urgency. Some debts require immediate attention due to the serious consequences of late payments; these are known as "priority debts." Examples of priority debts include: - Rent arrears - Mortgage arrears - Secured loan arrears - Payments for goods purchased on hire purchase or buy now pay later (BNPL) arrangements - Unpaid electricity bills - Unpaid income tax While focusing on paying off low-interest debts first may be tempting, this strategy is not always the best choice. Prioritizing and paying off the debts with the highest interest rates first can save you the most on interest payments and help reduce your total debt more quickly. 3. Make a Budget of Expenses: James Lendall Basford said, "The man who never has enough money to pay his debts has too much of something else." Budgeting is crucial for tracking expenses and understanding monthly income. Keeping receipts can reveal spending habits and highlight impulse purchases. If funds are tight after bills, reconsider your spending or look for new income sources. When shopping, only bring the budgeted amount to minimize impulse buying. Sticking to a budget requires discipline, but it's vital for effective debt management. 4. Adjust Expenses to Encourage More Savings: It is important to review your regular expenses to identify any areas where you're overspending. You can address these spending leaks by eliminating unnecessary costs or reducing your spending on indulgences like dining out, internet services, streaming subscriptions, vacations, and more. Choosing more affordable product options is another effective way to save money, allowing you to allocate those savings towards debt repayment. 5. Dedicate Funds for Financial Emergency: Create a dedicated savings account for financial emergencies, aiming to have at least six months' worth of expenses saved up. The purpose of this account is to ensure that funds are readily available to cover expenses in case of an unexpected situation that negatively affects your income. This way, you can avoid falling into debt due to a lack of available funds. 6. Increase Earning: Taking on extra jobs to earn additional income and pay off debts can be an effective way to escape financial burden. Consider selling personal belongings that you no longer use as a means of decluttering. You could also transform your passions into a side business, such as writing, social media management, or coaching. Other profitable and legal side jobs include affiliate marketing, publishing e-books, providing virtual assistance, graphic design, and personal shopping. 7. Repay Debts on Time and Above Minimum: Paying debts on time helps you avoid extra charges for late repayment. Making early payments boosts your credit reputation and positively impacts your credit score. Additionally, paying more than the minimum amount due on a debt can help reduce the risk of default, save on interest costs, and expedite your journey to becoming debt-free. 8. Track Debt Repayment: Tracking debt repayment is essential for effective planning. Establishing a system to monitor repayment, such as the CRC I-CON Plus (Individual Credit Overview Report) and the CRC Monitor and Alerts, is a good way to keep an eye on credit exposures and any immediate changes in credit positions. This ensures that debt repayments to creditors are both up-to-date and accurate. 9. Seek Professional Advice: Some debt situations may necessitate the assistance of a credit advisory company, such as CRC CACS (Credit and Advisory Services) to navigate seamlessly. A credit advisor can help develop an efficient debt repayment plan, ensuring that debts are paid off smoothly and on time. Establishing financial discipline is essential for mitigating the risks associated with debt. It is imperative to identify the underlying causes of debt and implement the necessary financial adjustments to effectively prevent its recurrence. Furthermore, building an emergency fund to address unexpected expenses-such as medical bills, job losses, and car repairs-can significantly reduce the likelihood of resorting to debt as an immediate solution. Additionally, developing and adhering to a stringent budget that prioritizes essential expenditures while curbing impulsive spending will facilitate effective debt management and prevention Queendaline Osuji, Regional Relationship Manager, South-East and South-South, CRC Credit Bureau
NAVIGATING DEBT AND CREDIT REPAYMENTP: PRACTICAL TIPS FOR CONSUMERS ON MANAGING DEBTS EFFECTIVELY
