Remember that when it comes to applying for a loan, say for a home or a new car, having no credit record could actually count against you. Debt-free living may seem like the financially responsible approach, however with proper debt management, good debt could actually help improve your life, create wealth and improve your credit score.
Remember that when it comes to applying for a personal loan, a home loan or vehicle finance, having no credit record could actually count against you. This is where the concept of good debt vs bad debt comes into play.
Good debt helps you grow
So, what is good debt? Good debt is an investment in your financial future. It helps to create a firm foundation and possibly improves your future earning potential. If you’re about to take out a loan or go into debt, ask yourself these questions first:
- Is this the most affordable loan/option available to me?
- What is the interest rate? (Lowest interest rates are not always the best option – sometimes a low interest rate comes with high charges, so do your research first.)
- What are the repayment terms? Can I really afford it?
- What are the charges?
Some examples of good debt are home loans, student loans and business loans. However, there are no guarantees and you should always be cautious when going into debt, especially in South Africa’s current economic climate. For example, paying off your student loan might be difficult if you’re unable to secure full-time employment.
Bad debt weighs you down
Bad debt is often associated with impulse purchases. Buying day-to-day items such as foods and disposable product, or paying everyday bills, can very quickly lead to bad debt. Some examples of bad debt are:
- Using your credit to purchase luxury items that you can’t really afford.
- Taking out one-month loans from unregulated institutions to finance an immediate need.
- Buying clothes and other items on clothing store accounts (which usually have very high interest rates).
Too much debt, whether it’s “good” or “bad”, can quickly add up. If not managed properly, even good debt can become bad debt and may even lead to forced debt counselling. Below are a few grey areas:
- Credit cards can be used to finance large expenses and can be very useful, provided that you pay off the balance each month. However, credit cards often come with a high interest rate and you could be in trouble if you let it build up. If you think a credit card could help you move forward financially, click here to find out more about the African Bank credit card.
Learn how to manage your credit card better with the tips in this blog post: How to use your credit card wisely
- Vehicle finance can be good or bad debt. If you need a car to help you earn income and you can manage the monthly repayments, as well as associated costs like insurance and petrol, vehicle finance would be good debt. However, a new car loses value as soon as you drive it off the lot, so consider buying a demo model or a used car. Whatever you decide, make sure it can fit into your monthly budget.
- Borrowing money to get out of debt is not usually advisable. However, debt consolidation loans offer a simpler way to manage your money when your goal is to regain financial stability. One of the biggest benefits is that instead of dealing with several creditors - all with their own terms, monthly fees and interest rates – debt consolidation bundles all these payments into one affordable monthly repayment, often lowering the total cost of credit to the consumer. Click here to find out more about an African Bank Consolidation Loan.