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Debt In South Africa: Everything You Need To Know

In this article, we talk about all things debt. How your credit score can have an impact on your insurance premium, whether or not paying off debt is better than saving for retirement and how to be debt-free by the age of 30.

Does Your Credit Score Affect Your Insurance Premiums?

If you have bad debt, will your car insurance go up? We have a look at how much your credit score can impact your premium.

Having a credit history is important for you to be financially capable of making various financial decisions. Buying a car, renting an apartment, or buying a house depends on you having a credit score. Once you start getting into bad debt, however, your credit score starts decreasing and you start becoming a risk to creditors. Creditors and insurance companies are now, more than ever, examining the risk profiles of potential clients to establish their creditworthiness.

Credit-Based Insurance:

Most insurance companies in South Africa currently use credit-based insurance scores to determine the risk of potential clients. They determine the likelihood of the client being able to repay the loan and insurance based upon their history of paying previous and current debts. It is important to know that credit-based scores are different from the personal risk profile. This is calculated by assessing the person’s age, income, and personal information that determines the likelihood of the person claiming. The score, as well as the personal assessment, are both used in determining the amount of the premium.

Insurance companies receive credit information about potential clients from rating agencies. The agencies include Experian, Transunion, and XDS. They don’t, however, receive the full credit report, but rather the encrypted score of the individual.

What Should You Do For a Good Insurance Rate?

Consider the following when reviewing your insurance rate:

  • What is your claims history like? If you have ever claimed, your premium will be higher.
  • Do you have any blemishes on your driving history? Have you ever been arrested for drunk or dangerous driving? Your premium could be higher.
  • What does your credit history look like? A long-established credit history with well-managed clothing accounts and credit cards.
  • Are you behind on payments? No late payments or past-due accounts.
  • What is your record with opening accounts? Open accounts in good standing.

Research has shown that people with a good credit history tend to be less risky on the road than those with a bad credit history. Credit-based insurance has, therefore, been proven to be a solid predictor of risk. The better your credit history, as well as your driving behaviour, the lower your premium will be. The insurance industry is extremely competitive with each company trying to offer a lower premium than others. You can, however, dictate a low premium by maintaining a solid, stable credit history.

Pay Off Your Debt Or Save For Retirement?

Getting into debt has become a cultural rite of passage for most South Africans. So, should we pay off our debt or save for retirement?

Can you pay my bills? Can you pay my telephone bills?

Perhaps Destiny’s Child were also trying to figure out where to find extra cash to start saving for retirement. Just like us, mere mortals. 

When asked, someone once told us that they paid their debts according to whoever called first. This (over-indebted) individual obviously did not have enough to go around at the time. But, say they had a bit more freedom to choose, would they pay off their debt? Or grow that cash for retirement? It’s a valid question for any of us. Especially in a ‘financed’ culture, where we’re paying off everything we think we own. More than half of South Africans owe as much (or more) than 75% of their salaries to debt repayments. It comes as no surprise, then, that many people choose to fast-track debt repayments – and delay boosting retirement contributions in the process. But, what you save in interest with this method, you pay in compound interest lost by not saving for retirement. 

Considering the statistics from our National Treasury that only 6% of South Africans will be able to retire without having to change their standard of living, this is a considerable cost. Steven Nathan, 10X Investments CEO, shared on the 10X blog that the reason for this dire statistic is that people don’t understand the retirement savings industry. He says that it is crucial people understand how retirement funds work in order to achieve a comfortable retirement. 

Most people underestimate the losses incurred when they delay saving for retirement. An example would be someone who needs to free up some cash short-term and chooses to make a retirement annuity ‘pay up’ instead of cutting DStv for a year. Nathan advises you ask yourself: “How much money do I need to save to have the same standard of living in retirement? Am I saving enough? Am I on track? Am I saving the right way?”

Three Important Considerations:

Christo Davel, 22seven CEO, said that where debt and retirement are bidding for priority status in your budget, the question shouldn’t be ‘either/or’.

“The practical solution is to find money. We believe that there is almost always some money to be found … it may be R100 a month or R1 000. Once you know where it is, then you can think about the ‘debt or retirement’ question practically.”

Financial adviser, Bray Creech, recently shared on the Citizen-Times (a subsidiary of USA Today) that implicit in the ‘debt or retirement’ question, is that you are paying all of your minimum monthly loan payments (obviously). He advises that there is no one-size-fits-all answer, but emphasises some important considerations to make.

1. Know-How Much You Owe

“…Make a list of all your debt. For each loan, jot down the following: how much you owe right now, your interest rate, and your minimum monthly payment,” advises Creech.

He advises you to focus on those loans with an interest rate of 10% or greater.

“Assuming you’ve made your minimum monthly loan payments, pay off the highest after-tax interest rate debt first. If that’s credit card debt at 17%, for example, then by paying that down you’re effectively getting a 17% return on your money. … In contrast, getting a 17% return on your money through investing is difficult, high-risk, and anything but guaranteed,” he adds.

2. Take Advantage Of Benefits

Besides retiring comfortably, there are other added benefits in saving for your own retirement. For example, SARS offers a rebate on your retirement contributions equal to the rate you’re taxed (up to a maximum of 23% of your income). That’s what we call a ‘cash money’ incentive… in hip hop terminology. Word. But, some employees have an even greater incentive. A company that offers to match the contributions on your company retirement plan. As in, what you contribute to your retirement, they match.

“If, for example, your employer offers a 100% match on the first 3% of your contributions, then you should contribute 3% of your salary into your retirement plan. Why? You’re earning a 100% return on that portion of your retirement account contributions,” says Creech.

3. Don’t Set Yourself Up For Failure

Creech confirms that, according to behavioural finance research, we’re more inclined to save and invest on auto-pilot. In other words, debit orders, stop orders, or automated payments from your bank account.

“That way, you don’t have the pain of writing a check or sending a payment each month.”

This applies to paying off your high-interest credit card, as well as contributing to your retirement. He also says some people respond to the psychological benefit of seeing debt disappear more quickly and prefer to pay their loans with the lowest balances first.

“While you may pay more interest with that approach, if it helps you stick with a plan, then stick with it,” he concludes.

How To Become Debt Free By The Age Of 30

It’s easy to fall into a habit, but it’s so much harder to get out of it. Impatience, poor planning, purchasing ostentatious goods, and constantly borrowing can quickly see you in debt before you’re 25 or even younger. Find out how to unburden yourself from it.

It's easy to fall into a habit, but it's so much harder to get out of it.

Impatience, poor planning, purchasing ostentatious goods, and constantly borrowing can quickly see you in debt before you're 25 or even younger.

Here are some tips for those eager to unburden their shoulders from the worry of debt.

Stop Thinking Like A Poor Person

In the case that you were born poor, that shouldn't be the reason you end up poor. You end up poor because of a poor mentality about money rather than a lack of it.


This is a poor money mentality:

  • You must be smart in order to be wealthy.
  • Fate determines your wealth or poverty in life.
  • Blaming others for your financial condition.
  • You need to become rich.
  • Your parents need to be rich for you to become rich.

Four things you should consider doing.


1. Start-Up A Business

A business can mean anything from selling your paintings, selling handmade crafts at the flea market, or reawakening a faded passion/hobby as a means for extra income. In this way you can eradicate debt from your life faster.


2. Stop Spending More Than You Make

Behaviour is the number one reason for debt. The assumption that it's normal for everyone to have bad debt is wrong. It's not normal to spend more than you make. Once you wrap your head around this statement, only then does the process of becoming debt-free by the age of 30 begin.


3. Educate Yourself Without A School Loan

There are so many other ways you can educate yourself today, without the huge debt of university fees. Many employers are looking for people with experience and a portfolio.

A degree no longer assures a job, even though tuition fees is the second most frequent cause of debt today. When you do decide to study, do it because it's something you love, and not because it's going to make your parents proud and then see you drop out in a few months.


4. Consistently Manage Your Debt

It's like going to rehab or dieting. You need to take each day as it comes but also plan ahead. You need to consistently manage your debt and murder it slowly through a sound, realistic plan.

If you are in debt, by following these steps, you could see yourself free of it before the age of thirty.