Are you heading into the debt trap?

You can avoid becoming one of the more than eight million people who cannot pay their bills if you heed the four warning signs described by Paul Slot,Debt counsellor/Director at Octogen.

“Households are increasingly slipping into debt,” Slot points out, “And while the general economic environment plays a role as the cost of living keeps rising and credit providers continue their aggressive selling of credit, consumers also need to become more responsible. In the first place, they must realise how important personal financial planning is. Secondly, they must take note of the four warning signs that indicate that they could be financially vulnerable.”

Planning a budget just one month at a time is not good enough, Slot stresses. When a crisis arises or there is a major additional expense, too many consumers resort to debt to pay for it, generally because they lack any savings. This could be the start of the slippery slope into debt.

“Consumers can take preventive action if they see the four danger signs and contact an expert for advice early on instead of incurring more debt to pay existing debt. This will enable them to put simple remedies in place to avoid falling into debt repayment stress.”

Firstly, keep a close watch on household income. If it starts dropping, whether temporarily or permanently, take steps immediately to control your expenses – don’t live beyond your means. “Income can be affected by lower commissions, loss of revenue by a family member, by divorce or separation, by sickness or any number of similar factors,” Slot points out.

Secondly, manage personal risk. Personal risk will increase if medical aid is reduced or cancelled or when consumers cash in existing policies.

Thirdly, refrain from over-spending and then funding the shortfall with debt. One of the first signs that this is happening is when the credit card cannot be repaid in full every month.

Finally, control existing debt repayment levels. “The average family uses 47% of the after-tax income to make monthly debt repayments,” Slot explains. “If consumers use more than this, warning bells should be ringing. It must be a sign for them that they should be trying to reduce debt instead of taking on more debt. Those who use less than 35% of after-tax household income to repay monthly debt commitments seldom have debt repayment problems.”

What happens to those who fail to heed the warnings and slip inexorably into greater and greater debt?

Slot points out that debt stress affects people on two levels: individually and at work. “Individuals subject to debt stress tend to develop unhealthy, and even destructive habits, like over-eating, or resorting to substance abuse – drugs or alcohol. They tend to neglect personal care. Conflict at home frequently increases.

“On the workfront, commitment to work decreases, absenteeism increases and there might be a rise in conflict levels. As a result, productivity suffers. Employers should note early warning signs, such as requests for advances on pay or for access to pension savings, a reduced level of satisfaction at work and requests for time off to resolve personal issues.”

The good news is that there are solutions. Employers can contribute by exposing employees to financial wellbeing training and organising access to possible debt remedies. Consumers should not wait until the situation has deteriorated, but on noting one or more of the four warning signs above, should seek professional advice from an accredited debt counsellor who can help get their finances back on track.