It’s been a challenging year on many fronts and all most people want to do is let their hair down and enjoy everything the festive season has to offer. While there’s nothing wrong with this per se, it’s also wise not to overindulge and end up with a financial headache that lasts long after the glow of Christmas has worn off.
The reality is that the economy isn’t what it once was, and most indicators point to 2015 being just as challenging as, if not more so than, 2014. With this in mind, it is extremely important to not just live in the moment, but also to prepare for tough times.
Break the tradition
One Christmas “tradition” the banks are urging consumers to avoid is using their December bond repayment to splurge on holiday expenses. Calvin Ndlovu, Head of Operations at FNB Home Loans, says that consumers are often tempted to miss their end-of-year home loan repayment because they have not budgeted for festive season spending. While seemingly innocuous, such behaviour is risky from both a financial and credit perspective.
Notes Ndlovu: “If you catch up on your arrears there will be no penalties imposed by the bank for late payment, but there will be accrued additional interest on the outstanding capital. However it is important to remember that for most people, there is a long stretch from the December pay check to January’s, which makes it difficult to catch up with the home loan repayments in that month. What’s more is that while your bank can make arrangements for the repayment of arrears, there will still be an impact on your credit record.”
Impaired credit record
In such instances, a default of part of or the full instalment reflects on your credit record around 20 days after default and will remain there for as long as you are in arrears. This may impact your ability to apply and receive credit as the active payment record will remain on your credit bureau profile for two years. After a 30-day period, the consequences of the missed instalment will begin to take effect.
Ndlovu says that, on average, it takes people four months to catch up on one missed bond repayment. And after three missed payments the bank will proceed with legal action, which could ultimately put you in danger of losing your home.
One of the ways to avoid the dreaded default is to pre-pay into your home loan throughout the year. If you build up a reserve in your bond, and are more than one repayment in credit, missing a repayment will have no effect. This is a far better and effective option than going into arrears as you will not only preserve your credit record but you will also have the advantage of reducing the interest on your capital for the period that you have pre-paid.
Another way to avoid the post-Christmas financial stress is to plan ahead. Establish what you can realistically afford to spend over the festive season and, if you can’t afford a specific item, try and find a cheaper alternative – or accept that you may have to go without it.