How to avoid the debt trap as a young professional

Starting your professional journey is exciting; a steady income, financial independence, and the ability to finally say yes to things you've been putting off. But with this newfound freedom comes responsibility, especially when it comes to credit. South African youth are increasingly vulnerable to debt traps, often lured by the promise of "buy now, pay later" without fully understanding the consequences.

 Recent data indicates a significant uptick in credit usage among young South Africans. According to TransUnion's Q2 2024 Industry Insights Report, the number of credit-active consumers grew by 4.7% year-over-year to 18.5 million, with Millennials and Gen Z accounting for 62% of new credit originations during the quarter. Notably, Gen Z's share of new credit card accounts increased by 22.7% year-over-year.

 While access to credit can be a powerful tool for building a financial future, it also poses risks if not managed carefully. The same report highlights that 33% of consumers intend to apply for a new personal loan in the next 12 months, indicating a growing reliance on credit to manage day-to-day expenses. Understanding how to navigate this credit landscape is crucial to avoid falling into debt traps that can hinder your financial goals.

5 Practical Strategies to Stay Out of the Debt Trap

 1. Grasp the Full Cost of Credit

Credit isn't free money. Whether it's a credit card, clothing account, or personal loan, each comes with interest rates, initiation fees, and service charges that can accumulate quickly. For instance, a personal loan from a non-bank lender carries a delinquency rate of 40.6%, indicating higher risk and potential cost. Before committing to any credit agreement, request a detailed breakdown of the total repayment amount and compare it to the cash price to understand the true cost.

 2. Live Within Your Means

It's tempting to upgrade your lifestyle with your first paycheck with new gadgets, trendy clothes, more outings, or a fancy car. However, succumbing to lifestyle inflation can lead to overreliance on credit. The TransUnion Consumer Pulse Study found that 52% of consumers have cut back on discretionary spending, indicating a need to prioritize essential expenses.  Consider implementing the 50/30/20 rule. Allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayments.

 3. Build and Stick to a Budget

Budgeting empowers you to take control of your finances by providing a clear picture of your income and expenditures. With the rising cost of living, many South Africans are turning to credit to manage expenses. Utilize budgeting tools or apps to track your spending and identify areas where you can cut back, ensuring you live within your means.

4. Monitor Your Credit Score

Your credit score influences your ability to secure loans, rent apartments, and even affects employment opportunities. Clear Score, for example, offers one free credit report annually, allowing you to monitor your financial health. Ensure to regularly check your credit report to identify errors or signs of identity theft and take steps to improve your score by paying bills on time and reducing outstanding debts.

 5. Seek Help Before It's Too Late

If you're struggling with debt, you're not alone. The National Credit Regulator reported that 18.1 million people applied for credit in Q3 2024, a 3% increase from the previous quarter. You can reach out to organizations for financial education workshops, one-on-one credit coaching, and practical tools to help you manage and overcome debt.

 Empower Your Financial Future

Credit, when used responsibly, can be a valuable asset in building your financial future. However, mismanagement can lead to long-term debt and financial stress. By understanding the true cost of credit and monitoring your credit score, you can avoid the debt trap and achieve financial stability. Consider speaking to a registered financial adviser who can help you structure a plan tailored to your income, goals, and debt profile.

This professional guidance can make a significant difference in your long-term financial journey. And remember, you're not alone. Start watching YouTube videos or listening to podcasts to find out how your peers are managing their finances. Learning from real stories and relatable experiences can be just as powerful.

* Coetzee is the CEO of FinFix.

PERSONAL FINANCE