Avoid the Debt Consolidation Pitfalls

Beware Of Plastic!

  • Store cards and credit cards may be convenient, but they are also an easy way getting caught up in the debt trap. The reality is that in most cases people get so dependant on this kind of credit that it ends up being a long term liability.
  • The best investment you can make is to repay high interest debt. By paying off debt, you get one of the best returns available, tax-free. The tax-free return you receive from paying off debt is likely to be greater than any returns (which are likely to be taxed) you receive from an investment.
  • Always pay the full amount owing on your credit card. If you do not, you will be charged a punishing rate of interest from the date of purchase. The so-called budget account on your credit card is a misnomer, as you pay a high rate of interest.
  • Use a credit card to get 55 days’ interest-free credit by buying at the start of the buy-and-pay cycle and repaying the debt in full by the due date. This option does not apply to cash withdrawals and petrol purchases, on which you pay punitive interest rates from the date of the transaction.

Taking Your Credit For Granted

  • In the last few years the way lending decisions are made has become much more automated. The way decisions are made has changed dramatically, for the most part decisions are made based on certain guidelines and not left up to subjective humans.
  • This places more and more importance on your credit rating when applying for a loan. How good your credit rating or “scores” are, depends on several factors such as: Current credit balances, amount of current available credit, late payments (How many, How late, How recent, Type of Account) and recent inquiries about your credit.
  • If you are planning on getting a mortgage loan, make sure you are making all of your current payments on time and avoid any unnecessary inquiries into your credit. In other words, don’t go out shopping for a car or new furniture and have sales people all over town running credit checks on you.
  • If you want to have the highest scores possible, and therefore qualify for the best rates available, it is best to be patient and wait until your loan is done before you do things that will affect your score.

Borrow Wisely

  • Expensive debt is a quick way to lose money.
  • Most mortgage bonds enable you to repay more than your set repayments and to borrow against what you have paid.
  • This is useful not only to borrow money for other things at short notice, but also to use as a savings account.
  • The effective interest you receive is much greater and there are no additional costs. Say, for instance, you need to put away money to pay school fees or provisional tax. “Save” the money in your mortgage bond until you need it, rather than in a low-interest bank savings account.
  • Link your cheque and bond account. Pay your salary into your cheque account and since interest in calculated daily, this will reduce your loan amount and hence the interest you will pay.
  • Deposit your bonus into your bond and you will be surprised at the amounts you will be saving. If you pay for example a lump sum of R40 000 at the end of the first year on a bond of R500 000 @ 12% you can reduce your bond repayments with almost 7 years!

Manage Your Mortgage

  • Ensure that your pay your bond on a regular basis. Do not miss any payments since this will increase your interest liability. Arrears are costly and should be avoided at all times.
  • If you decide to cancel your bond study your loan contract and see if contains any penalty fees. If it does give at least 3 month’s notice. Some institutions can charge you a penalty fee that is equal to three months interest.
  • Think carefully before you decide to make use of interest only home loans. Although this will be affordable in the short term, contemplate the effect this will have on you and your family over the long term.
  • Interest rates been on the rise steadily, which will result in your interest payments being more that before. You could end up in a worse financial position than before.
  • Additionally you will remain in debt for much longer by delaying the repayment of the capital debt.
  • Remember there is nothing like a free holiday. Some institutions are offering payment holidays when you register a new mortgage bond with them. You can delay the payment of your first installment up to a certain number of days. In the mean time you are accumulating extra days of interest
  • Always make use of the services of a bond broker to help you avoid any potential pitfalls.

For more information on debt consolidation, bonds and other related articles go to www.globalproperty.co.za

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