What is Your Debt Limit?
What is Your Debt Limit?
For many Consumers, the answer to this question is: whatever is approved by the Credit Provider but in many cases, the correct answer is actually the point where you start to experience financial stress.
Debt can be good especially if you buy an asset or pay for education or a funding of a real financial emergency and you can comfortably afford the repayment. When you cannot afford the repayment, no debt is ‘good’. So the question is: what is the correct balance?
‘When you cannot afford the repayment, no debt is ‘good’
Every Consumer’s financial position is different but there are some general rules that should be applied.
That Budget You Never Do
The starting point is your budget. Less than 5 % of Consumers actively manage and control their budget and it is unlikely that this percentage will significantly increase. A more effective way to manage your budget is to understand and manage your spending behaviour.
Debt Counselling Firm, Octogen has actively tracked Consumer spending since 2002 and spending behaviours have changed. This change was, on the one hand, driven by high cost ‘drivers’ and on the other hand the Consumers’ own spending priorities.
Things That Drive Up Costs
High food cost drivers doubled spending on groceries over the last 10 years from an average of 10% to an average of 20% of after tax income. Cost drivers also forced higher spending on travel, electricity and rates and taxes.
Spending Behaviour Changes
Examples of higher Consumer priority spending include education, data and security. These changes in Consumers’ spending patterns have a direct impact on the amount available for debt repayments. If Consumers understand their own spending patterns it is easy to manage. This aspect is however ignored by too many Consumers and where this is the case, taking on more debt is then regularly used to temporarily balance their budget.
‘Credit Providers have to check if Consumers can afford the debt repayments’
So, back to the question of what is my debt limit? The ability to repay debt is a key component in the National Credit Act where Credit Providers have to check if Consumers can afford the debt repayments. This assessment is driven by three components – Current living expenses, spending on risk services (such as pension, medical aid, insurance, and own savings) and committed debt repayments.
When we analyse the spending patterns of Consumers who apply for Debt Review a common trend is that the amount of income required to repay debt is excessive. 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. Where this is the case Consumers cannot afford normal living expenses and debt repayments at the same time and desperately need help.
The question then naturally becomes who should be blamed for this? In the NCA it is stated that both the Consumer and Credit Provider are responsible when new debt is applied for and approved. A common starting point for trouble though is the “under” disclosure of monthly spending by Consumers when they apply for a loan and secondly how this information is then processed by the Credit Provider.
Your True Limit
If you want to know what your true debt limit is, then if you apply for credit disclose all your living expenses and avoid the trap of providing the Credit Provider with less than 100% of the information about your current spending. Rather disclose everything and enable the Credit Provider to approve the application for debt based on what you really can afford. They will offer you what they know you can safely repay each month. Don’t take on credit you cannot really afford to repay. Stick within your debt limit.
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If you feel you have passed your true debt limit and can’t afford to repay your debts and still cover basic monthly living costs get help from an NCR registered Debt Counsellor. Feel free to check the service directory section of each issue of Debtfree Magazine.
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About the Writer:
This article was written by Paul Slot, Debt Counsellor and Director of Octogen.
Find out more about Octogen HERE