Not all debt is good debt, of course. Going into debt for spending that has no lasting value, like an expensive vacation, a fancy dinner out or a 65-inch TV, is a bad idea. But you may need good debt to achieve certain life goals.
What is good debt?
Good debt is debt that’s used to pay for something that has long-term value and increases your net worth (such as a home) or helps you generate income (such as a smart investment).
In order for people to build up a solid credit history and gain a good credit score, some form of credit is required.
South Africans debts lie in-store accounts, personal loans and credit cards. Meaning that the majority of credit-active consumers spend most of their income on credit that often does not benefit them in the long run… These types of credit tend to have high interest rates and encourage the purchasing of assets that lose value over time.
Types of debt
Understanding the main types of credit can help you find the best way to borrow and make repayments.
1. Secured Credit
This is when lenders insist on having assets connected to the agreement, as collateral. If you can’t repay your credit, the lender has the right to repossess the asset to pay off what you owe.
Mortgage
The home you are financing secures the credit, this allows you to take out money against your home.
Car loan
The car forms collateral for the loan. If the loan is not repaid, the car will usually be sold off for the remainder of the owed amount.
Home loan
Your home secures the debt. This will also allow for the property or house to be sold off to the value of the remaining debt, in order to settle the account.
2. Unsecured Credit
This type of credit relies on your written promise, with no secured collateral – promising repayment without putting anything on the line. They accept you will repay the debt as agreed. If you don’t repay on time or in full, you may be charged more interest or fees, and your credit score could be damaged, limiting your ability to borrow in the future. This type of credit has a shorter repayment plan to ensure the debt is recovered.
Credit cards
When approved, this type of credit asks that you pay in a monthly minimum towards your outstanding balance. More can be paid to reduce interest on your debt, however only the minimum is required.
Read: First time credit card user
Retail store and petrol cards
Repayment is usually on a monthly basis and an agreed on minimum must be paid each month into the account. Similar to a credit card, but often with different policies and rates.
Questions to ask yourself before getting into debt
Before you borrow any money, there are some important questions you should ask yourself to ensure you’re making a sensible decision that won’t impact your financial future.
Are you thinking about lending money? Ask yourself these questions before you do:
- Can You Make the Repayments?
- How Fast Can I Pay it Off?
- Am I Rushing into this Purchase?
- What Happens if my Financial Situation Changes?
- Do I Really Need to Borrow This Money Now?
- Will This Debt Help to Increase my Net Worth?
How to Get Out of Debt
Make a budget
When you give every Rand a job, you make sure the bills get paid while you make progress on your goals. Tracking your expenses every month also makes it easier to see where you’re overspending and where you can cut back. A budget tells your money where to go so you’re not left wondering where it went.
Free Course: How To Budget Like A Pro
Target one debt at a time
Do you carry a balance on more than one credit card? If so, make sure you always pay at least the minimum on each card. Then focus on paying down the total balance on one card at a time. You can choose which card you target in one of two ways:
Focus on high-interest debt
Check the interest rate section of your statements to see which credit card charges the highest interest rate, and concentrate on paying off that debt first.
Use the debt snowball method
The snowball method is a debt-reduction strategy where you pay off debt in order of smallest to largest, gaining momentum as you knock out each remaining balance.
Here’s how it works:
- List your debts from smallest to largest regardless of interest rate.
- Make minimum payments on all your debts except the smallest.
- Pay as much as possible on your smallest debt.
- Repeat until each debt is paid in full.
Pay more than the minimum
Look at your credit card statement. If you pay the minimum balance on your credit card, it takes you much longer to pay off your bill. If you pay more than the minimum, you’ll pay less in interest overall. Your card company is required to chart this out on your statement, so you can see how it applies to your bill.
Consolidate your debts
Consolidating your debt lets you combine several higher-interest balances into one with a lower rate, so you can pay down your debt faster without increasing payment amounts.
Need help consolidating your debts? Debtsafe offers safe and secure Debt Consolidation. Its registered Debt Counsellors fix debt within the firm jurisdiction of the National Credit Act (NCA) – is closely monitored by the National Credit Regulator (NCR).Read: Debt counseling versus debt consolidation
Create a plan
Your plan doesn’t have to be complicated. Here are three important questions you must answer when creating a repayment plan:
- Beyond your minimum monthly payments, how much extra money can you put towards your debts each month?
- Which debt will you put that money towards first?
- How will you prioritize those other payments once that first debt is gone?
Commit raises, bonuses or other financial windfalls to debt reduction rather than adding these funds to your monthly spending pool. Using this “extra” money to chip away at your debt can help you reach repayment goals faster.
Free Course: How To Pay Off Your Debt
If you do find you’re struggling to pay your bills, you will need to contact the lender as soon as possible before the situation gets out of hand. There are many debt advice services that can support you if you find you’re struggling with your finances and credit repayments but before you get to this stage it’s always worth asking yourself the above questions before taking on any new debt in the first place.
For help or to find premium debt solutions in South Africa, give National Debt Advisors a call today.
