Household debt in South Africa is creeping up. It currently stands at 61.8 percent of disposable income, but by world standards this is comparatively low. In Japan and the UK, household debt is about 140 percent to disposable income, and the average American household is at 120 percent.

Uncontrolled spending can land you in trouble

Our buoyant economy and relatively stable rand is fuelling a consumer spending boom. There is a seemingly insatiable need to keep up with the Jones’s and just about everyone is offering the credit to do so. Easy access to credit means that it is not too difficult to push your household debt to unacceptable levels.

Old Mutual Bank’s marketing manager, René Roux, warns that uncontrolled spending can quickly spiral into a credit crunch. This is when you end up spending all your disposable income servicing debt and don’t have any left to save, invest or put away anything towards your retirement.

Debt judgments on the rise

And it’s not an idle warning. Despite a decline in civil judgements for debt since a peak in early 2003, the latest Stats SA figures show there has been a recent up tick in judgments for debt, with 114 755 summonses issued and 75 764 judgements totalling R608.3 million in November 2005 alone.

Of course not everyone facing a credit crunch ends up in court. Many anxiously struggle on from month to month, barely meeting their payments and desperately hoping nothing unexpected happens to tip the balance and spark a financial crisis.

Use a budget to control spending

The best way to prevent this situation is to avoid it, by drawing up a budget to help control your spending. Roux suggests listing essentials such as bond or rent payments, car repayments, rates, insurance and food first. 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, even if it is a relatively small amount, and put something away for your retirement.

"Just as people are incredulous by how easy it is to get into debt, many are surprised by how quickly you can accumulate wealth by putting a little away every month. And even though it’s better to start young, it’s never too late to begin accumulating wealth."

When you're already in debt

But what if you’re already mired in debt? Do you start hacking up your plastic or are there other options?

"Cutting up your credit cards may be a symbolic gesture, but won’t necessarily solve the problem," says René. "You need to understand where your income is going, what’s necessary and where you can make savings."

She recommends writing a list of everything you spend during a typical month. Remember to include all your store accounts and debit orders. Also list smaller items like food and entertainment.

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

Prioritise 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.

You’ll find that these are generally short-term debts such as shopping accounts and 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.

This list is different to the monthly budget in that it allows you to identify and target those debts that attract the most interest and therefore cost the most to service. Once you’ve prioritised these you can actively begin reducing them using some of the savings you’ve made by cutting back on non-essential spending.

"You need to be ruthless and disciplined so you can get rid of the short-term debt as soon as possible. Every day you delay costs you more money in interest. And most importantly, don’t be tempted by offers to open up new accounts or take on more debt or you’ll be back at square one before you know it," says René.

Try debit, not credit, cards

If you do feel the need to cut up some cards in celebration once you’ve got rid of your short-term debt, try to restrict yourself to shopping cards. It’s not a great idea to cut up credit cards, as a credit card can be a handy financial tool if used responsibly. Credit cards are widely accepted, can be a useful contingency in emergencies and are generally safer to carry than cash.

But if you’re nervous about falling back into the debt trap, consider a debit card. Like credit cards, they’re safer than carrying cash, but by definition you can’t run up credit on a debit card; you must have the money in your account. In short they offer you the transactional convenience of a credit card, without a credit facility.

Good and bad debt

René says that 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 don’t really need and will lose, rather than retain or increase its value.

"Perhaps the most important thing is to remember you don’t have to face debt alone. If you’ve got a debt problem speak to the financial adviser at your bank. Not only should he or she be able to help you tackle the short-term problem, but will also do a financial needs analysis and help you draw up a plan to put you on a sound long-term financial footing."