Picture: ISTOCK
Picture: ISTOCK

When we decide to roll up our sleeves and tackle our debt, we so often focus on the end goal that we forget to think about the contracts we signed and the implications of settling our debt early.

Not all debt is equal, and paying off some debt early can cost us more money than we need to pay. Many people tend to overlook the dreaded settlement fee - you need to think carefully and plan ahead when it comes to settling this amount.

If you have a cellphone contract, contact your service provider to find out what the implications are of settling your account early. Even if you're left with two R300 payments, your early settlement penalty could be R1 500 - making it pointless to pay the account off earlier.

For accounts such as credit cards and store or furniture accounts, making regular payments works in your favour.

These short-term debts generally don't attract any early settlement penalties. If you want to make sure you don't mess up your credit score, focus on making regular and timeous payments. Don't use all the credit available to you as this works against you.

Remember that the point of credit is to help you; it should not be used for wasteful spending.

The same applies to personal loans.

Long-term loans usually attract penalties for early settlement or cancellation of the loan for whatever reason.

Usually, banks will let you off the hook if you request a settlement quote first and pay the outstanding amount within the quote's validity period. For longer-term secured debt such as a car or home loan, it's advisable to give the bank notice should you want to settle your loan or terminate the arrangement. If you want to refinance or switch financing houses, give your provider sufficient notice.

According to the National Credit Act, vehicle finance agreements for under R250 000 are not subject to a settlement fee - you can settle early without a penalty.

However, if the value of your car finance agreement is more than R250 000 - or you want to repay your home loan early - you can be charged a penalty fee. This depends on the remaining balance. Banks typically charge 90 days' worth of interest on the balance.

It may take that 90 days to settle the home loan, so you might be lucky and miss the fee. But don't wait for it to come to that. If you can see that you're going to be able to settle your debt in advance, take action so that you're not caught out later. You can make payments into your bond but leave your bond open without attracting early settlement fees.

Despite the fees, it is still a good idea to pay a little more than your required car instalment so that you can bring the end of your contract closer. The plus side of advance payments is that you don't have access to the excess funds. If you struggle with discipline, this is one way to curb temptation without missing a step on your debt repayment plan.

If you're paying off debt early in the hope of improving your credit score, be aware that your credit score is kept alive as long as you have credit. So paying off and closing accounts isn't always a good idea if you plan to access credit again.

Taking control of your finances, especially if you're trying to rein in your debt, is smart. But always do your homework when it comes to credit agreements - read the fine print and make sure you understand the terms of your contract so you can work around them as an informed consumer.

Tsamela is the founder of Piggiebanker.com. Follow her on Twitter @Piggiebanker