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What is Your Debt Limit?

The answer is the point where you start to experience financial distress. But for many consumers, the answer to this question is: whatever is approved by the Credit Provider.

Debt can be beneficial especially if you are funding a real financial emergency, buying an asset or paying for education and you can comfortably afford the repayments.  When you cannot provide the repayment – that’s when the debt becomes “no good”. So what is the right balance?

‘When you cannot afford to pay back the debt then no debt is ‘good.’

Every person’s financial situation is different, but some general rules can be practised.

 

That Budget You Never Draw Up

The first thing to look at is your budget. Less than 5 % of consumers actively control and manage their budget, and it is not likely that this percentage will drastically increase. A better way to manage your budget is to understand and manage your spending behaviour.

A Debt Counselling firm, Octogen tracked consumer spending since 2002, and they concluded that buying habits have changed. This change was instigated by high cost ‘drivers’ and on the other hand the consumers’ own buying preferences.

 

Items That Drive Up Costs

High food prices doubled spending on groceries over the last ten years – after tax income – from an average of 10% to an average of 20%. Cost drivers also enforced higher spending on electricity, travel and rates and taxes.

 

Spending Behaviour Changes

Examples of higher consumer spending include data, security and education. These behaviour changes in the consumers’ spending habits directly impact the amount available to pay back debt. If consumers understand their own spending habits, it is easy to manage. Too many consumers, however, ignore this and taking on more debt is then often used for a short while to balance their budget.

‘Credit Providers have to check if consumers can afford the debt repayments’

So, we ask the question again: what is my debt limit? The capacity to repay debt is a crucial ingredient in the National Credit Act where Credit Providers have to see if consumers can afford the repayments on their debt. This evaluation is driven by three factors – Committed debt repayments, spending on risk services such as medical aid, pension, own savings and insurance and current living expenses.

When we evaluate the spending habits of consumers, who apply for Debt Review, a general trend is that the amount of income needed to repay the debt is disproportionate.  More than half of the consumers who apply for Debt Review have committed more than 70% of their after-tax income on monthly debt repayments. Therefore consumers cannot afford regular living expenses and debt repayments at the same time and desperately need help.

The question then logically becomes who should carry the blame for this? In the NCA it states that both the Credit Provider and consumer are responsible when new debt is applied for and approved.

 

Your True Limit

If you want to find out what your exact debt limit is, disclose all your living expenses when you apply for credit and avoid the pitfall of providing the Credit Provider with false information about your current spending. It is better to disclose everything and allow the Credit Provider to approve the application for debt, based on what you really can afford. You will be offered what they know you can safely repay each month. Don’t buy on credit things you cannot really afford to repay. Stay within your debt limit.

 

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If you can’t afford to repay your debts and still cover necessary monthly living costs, you have most probably passed your true debt limit. You can get help from Persolvo Debt Consultants who will gladly assist. Feel free to contact us at 072 011 4900 or drop us a mail: admin@persolvo.co.za

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