While it is understandable people want to let their hair down and take a well-deserved break this December, African Bank warns the repercussions of overspending can have a ripple effect long into the New Year.
The bank says it is vital to think about repaying debt before spending money on Black Friday or Christmas shopping because failing to keep up with debt like loans, credit cards and motor financing will affect your credit score – which can affect your life planning in the long term.
“On the back of an unprecedented year globally, due to the Covid-19 pandemic and lockdown, thousands of South Africans have experienced a year like no other – one which has been exceptionally tough on jobs, household income and the ability to repay debt, to name but a few,” says Neil Thompson, Head of
Product and Customer Value Proposition at African Bank.
“It is understandable consumers want to get back to normal. However, if normality means overspending during the festive season and falling behind on debt repayments you could be setting yourself up for another bad year come January.”
The 3 biggest reasons not to overspend this festive season
1. Your credit score
The value of a good credit score should not be underestimated.
Your credit score is essentially a personal asset and an investment in your future. It is used by credit providers to determine whether you should receive credit or not, in what amount and over what term.
If you default on payments or pay late, your credit profile is affected which could make it much more difficult for your applications to be approved when you are trying to get ahead in life.
What many consumers don’t realises too is that while adverse information is cleared as soon as your repayments are up to date or the account is paid up, the negative repayment history or any judgements against you remain for years.
2. What tomorrow may bring
Nobody knows what tomorrow holds – and Covid-19 taught the world that.
Every New Year brings its own challenges, financial and otherwise, but there are obvious expenses which must be planned for – such as school fees, school uniform and stationery, university fees, premium increases on policies, insurances and medical aid and the cost of inflation on your weekly grocery shop and petrol expenses.
Finding yourself in January without money to cover such expenses may mean you have to put yourself further in debt, perhaps with family or by having to apply for a personal loan.
Avoid this by saving money, not only for the obvious expenses but for the unforeseen too. An emergency fund can literally save your life one day if you have to be hospitalised for a serious procedure and don’t have money to pay for it.
3. Debt does not disappear
Although you may have enjoyed – or are still enjoying – a payment holiday from debt repayments during lockdown, remember these types of benefits offered by creditors are not free. They are welcome when you need them, as many people have in lockdown, but a payment break will cost you more.
Taking a payment break during the term of a personal loan, for example, does not change your monthly instalment amount but the term is extended to take into account fees and interest that accrue during the payment break period.
Any debt needs to be maintained. The only way to do this is to make regular payments or if you run into real financial trouble to speak to your creditors immediately. You can bury your head in the sand but debt does not go away, you can only pay debt away.
“The important message out of this pandemic is that financial planning for the unforeseen is imperative. This means saving money, not overspending and thinking tomorrow is another day,” Thompson concludes.
“Many people may recently have received a rebate from SARS and bonuses will also be paid out soon. If you are in this fortunate financial position, these windfalls should definitely rather be put into a high-interest bearing savings account than into revelling over the festive season.”