# Get answers to common questions on managing debt

What is debt management? And why is it important?
Debt management is really the process of planning to repay debt in a systematic manner so as to reduce the debt and pay it off as quickly as possible.

When is it necessary to come up with a debt management plan?
The moment you take on a loan, it is important to set up a clear plan of how you intend to repay it. It is necessary to develop a plan so that you lower the level of debt that you have and to get rid of the debt completely. Debt can cripple you financially and in many instances, results in stress and anxiety. It can also be quite distracting and affect all areas of your life, including your relationships.

It is therefore critical to create a budget that enables you to pay your debt consistently and stay on track. Debt management would also include trying to reduce your interest rates, for instance if you borrow using a credit card or a mobile app, you must have a play to pay back the debt in such a way that you do not incur very high interest cost.

What do you believe is the reason that a lot of young Kenyan are finding themselves in debt today?

People get into debt for various reasons. One of them is that we may sometimes find ourselves in difficult situations that were unexpected and unplanned for. Such as sudden illness or family misfortune. The lack of an adequate emergency savings leaves one with no choice but to borrow money to adequately deal with the emergency.

Many also get into debt as a result of spending anticipated income. For example, you may decide to spend your money on a holiday in early December without putting aside money for school fees or January rent because you anticipate that you will receive a bonus at the end of the month. If that bonus doesn’t come, it leaves one with no choice but to go into debt to meet those costs.

Pressure from friends and their spending habits may cause you to live a lifestyle that they consider “idea”. This then puts pressure on you to buy a car that you can’t afford or rent a house in a neighbourhood that is out of reach. One common one is where young people sign up their children in very expensive private schools at kindergarten level that they really cannot afford.

Gambling and alcohol addictions have also pushed many young people in Kenya into debt.

Having worked in the finance industry for a while what do you believe are the biggest challenges that Kenyans deal with when it comes to debt management?

Kenya has made huge strides in improving financial inclusion. Statistics from Central Bank of Kenya and FSD Kenya show that financial inclusion has increased from 27% in 2006 to 83% in 2019. While this has been an improvement, it has resulted in increased easy access to credit through mobile apps. This has contributed to a significant increase in indebtedness, and the loss of savings. Many of those who have borrowed now find themselves in a situation where their ability to borrow in the future is affected, due to being negatively listed by credit rating bureaus.

Another challenge that exists is low/ lack of widespread financial literacy education. Many are quick to sign up for opportunities without fully understanding what to look out for and what questions to ask, such as the terms and conditions of the loans that they get into… resulting in many not fully understanding what the total cost of their loan is.

Finally, debt in Kenya is very expensive, resulting in many getting locked in a perpetual state of debt, borrowing from one lender, to pay another and so on. This is a dangerous situation that robs many of peace, results in slavery, and prevents one from being able to build savings and to invest for their future.

What is the difference between good and bad debt?

Good debt is debt used for the purchase of an asset that has cash flows or brings in an income, or an asset that will increase in value and can be sold for a profit. Nevertheless, when one takes debt, they must know exactly how they will repay the debt, even if the asset or opportunity they are borrowing for does not work out.

Bad debt is debt borrowed without a plan, to finance consumption, or to lend to others. Bad debt is also debt that is borrowed simply because one qualifies to be able to get the loan.

What’s the most important factor to consider when coming up with a debt management plan?

You must be honest with yourself. Take an honest hard look at your sources of income, review and track how much you are spending and list down everything that you owe, to whom, how much and when it is due. Once you have the details of what you earn, what you spend and how much you owe, and what you own (assets), then you can begin to determine the plan of how you can begin to repay the loan.

Is a debt consolidation loan a good way to pay off debts?

When one has no choice and has accumulated loans that are at a level that are unmanageable, debt consolidation is an option that should be considered. Debt consolidation rolls all the debts owed into one loan that can be taken from a financial institution and stretched over a longer payment period, resulting in lower monthly repayments.

For instance, you may have a mobile app loan from three different apps, a SACCO loan, credit card loan, and a few loans from family and friends. If you find that you are unable to sustain the monthly repayments and perhaps have even defaulted on one or some of the loans, it may be useful to consider speaking to a financial institution to take over the loans and give you a longer loan period.

You will need to demonstrate that you have cash flows sufficient to repay the loan and some institutions may ask for collateral (security) in order to consolidate your loans. I advise that you speak to a credit expert who can understand your situation and assist you with the best solution given your circumstances.

If I have a problem with debt management, can counselling help? Yes

What are some of the reasons you have seen that cause one to over borrow or spend more than they earn? Answered above see question 3

What is a credit score, and why is it important to have a good credit score? Credit reference bureaus are organisations that collect data from financial institutions about borrowers. How much they borrowed, how long they took to repay, defaults and so on. This data helps lenders as they review borrowers. These organisations then have credit scores that they give borrowers and financial institutions use these scores to decide whether or not to lend.

https://www.metropol.co.ke/personal/scores/

How can one improve on a poor credit score? What are some things that’s some people can do?

Pay debt consistently and not default.

Unfortunately, in Kenya good payers are not rewarded with lower interest and better terms from most financial institutions. All we have is a blacklist, which means that those on the blacklist do not get loans, and that’s just about it.

When it comes to married couples, should they have a joint debt management plan or an individual one (should a couple manage debt individually according to what debt you are responsible for or together as a unit)?

In my view, couples that are in a healthy relationship must disclose to one another the assets and debt they have to each other. In a healthy partnership, one plus one is equal to five! When you put your heads together to face challenges that are before you, the burden is lighter, stress is less, and the solutions are easier to come by.

While it’s understandable why one party may choose to keep a financial secret from their spouse, such as insecurities, control, fear, it could later come to be a burden later. Further, non-disclosure and financial infidelity results in mistrust and can result in significant marital challenges.

I encourage couples to develop a joint debt management plan to get out of debt faster. In some instances, I have found that one spouse takes charge of finances and the other is sometimes disinterested, this is dangerous. I would encourage both to take an interest in their family finances even though one of the spouses has more knowledge.

Are there any tips or steps one can take to can help debt proof their life?

- Save and ensure that you also have emergency savings in place worth at least 6 months of your monthly expenses.
- Invest
- Plan your spending
- Determine what your values are, what’s important to you and live your life based on that and not what others define as success.