Debt is a term familiar to most consumers, but did you know that there's a distinction between good debt and bad debt?
James Williams, head of marketing for short-term lender Wonga, breaks down the meaning of good debt and bad debt.
Good debt: “A simple rule about debt is that if it increases your net worth or has future value in helping you progress financially, it is considered to be good debt.”
Bad debt: “If the borrower isn’t able to make their promised repayments, it is bad debt.”
What is the difference?
Shafeeka Anthony, marketing manager of JustMoney.co.za, offerered an analysis of the distinction between good debt and bad debt.
Good debt: An investment in the future
Anthony explained that good debt entails borrowing money to invest in assets that have the potential to appreciate over time or generate income.
Examples of good debt include student loans, mortgages, home improvement loans, business loans, and vehicle loans.
Bad debt: A burden on financial health
According to Anthony, bad debt is accrued for purchases that do not contribute to wealth-building or provide long-term value.
Examples of bad debt, which can lead to financial strain, include credit card debt, lifestyle loans, and financing a rapidly depreciating vehicle.
Getting rid of debt
Janine Horn, financial adviser at Momentum, shares six tips to help people avoid or break the cycle of debt:
– Ensure that monthly debt repayments are made on time; even a payment that is 24 hours late can be bad for a person’s credit rating.
– Pay the minimum instalment required on your debt repayment.
– Take care of your most “expensive” debts first because these are the accounts that generally charge high interest rates. This is called the avalanche method.
– Close accounts not in use as credit providers assess all of the credit accounts on record, even the ones that are not being used.
– If the consumer is able to, they should pay more than the minimum payment on accounts to improve your credit standing.
– Don’t ignore a letter of demand; instead, be proactive and take the appropriate action.
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