Credit act doesn't absolve consumers of responsibility

The National Credit Act means that lenders need to be more circumspect about granting debt, but this doesnt absolve consumers from taking responsibility for their own financial affairs.

"While the new rules make it more difficult to take on debt you can't afford, you can still get into trouble if you arent careful about managing your financial affairs," says Paul Maggott, spokesperson for ICE, Old Mutual Bank's young urban market offering.

He warns that uncontrolled spending can quickly spiral into a credit crunch. This is when you end up spending the bulk of your disposable income servicing debt and dont have any left to save, invest or put away towards your retirement.

"South Africans' seemingly insatiable appetite for spending means that even with the new rules in place, many people will still find themselves anxiously struggling from month to month, desperately hoping that nothing unexpected happens to tip the balance and spark a financial crisis.

The best way to prevent this situation is to avoid it by drawing up a budget to help control your spending. Start by listing the essentials such as bond or rent payments, car repayments, rates, insurance and food. This should allow you to work out how much is left for discretionary spending. But before you go and blow it all on a shopping spree, you should also consider your financial future. Try to save or invest some money ideally between 10 15% of your nett income and put something away for your retirement.

'Just as people are incredulous at how easy it is to get into debt, many are surprised by how quickly you can accumulate wealth by putting a little away each month. And the younger you start the better off youll be in later life."

But what if youre already mired in debt? Again, Paul says a budget is essential.

"Not only will writing a list of how youre spending your money give you a sense of control over your finances, but it will also enable you to decide where you can cut back on non-essentials and begin repaying some of your debts."

The next step in extracting yourself from the credit crisis is to prioritise your debts. Begin by putting those that attract the most interest at the top of the list. Youll find that these are generally short-term loans, while the longer-term debts such as car finance and mortgages, rent or rates will tend to come further down the list.

"You need to be ruthless and disciplined so you can get rid of short-term debt as soon as possible. Every day you delay costs you more money in interest. And most importantly, once youve made some inroads, dont be tempted to open up new accounts or you could be back at square one before you know it."

Paul says it's also important to distinguish between sensible and imprudent debt. Sensible debts are usually long-term debt, such as home loans, which enable you to buy a tangible asset that over time can improve your financial situation and give you more financial freedom. An imprudent debt is one which is incurred to buy something you dont need and will lose, rather than retain or increase its value.

"Perhaps the most important thing to remember is you don't have to face debt alone. If you think youve got a debt problem, get help. If you don't know a financial adviser, there should be one at your bank. A good financial adviser will be able to help you tackle the short-term problem, but will also do a financial-needs analysis and draw up a plan to put you on a sound long-term financial footing."