Bad debt causes dread and anxiety for tens of millions of South Africans. According to the South African Human Rights Commission (SAHRC), more than half of all SA consumers with active credit were over-indebted in 2015. That equates to over 30 million of us who are living well beyond our means.
However, the true context of the SAHRC’s findings is a little more nuanced. Not all debt is bad, and any debt that you can pay off comfortably can be defined as “good debt “. Good debt involves an asset, such as a house or a car, for example, that is paid off monthly but doesn’t strain your budget.
Managing this debt well grows your credit record, which is crucial for obtaining credit from lenders. Without a record of your debt management, banks and other financial institutions have no method of determining your ability to pay back a loan.
If you’re trying to obtain a positive credit score, there are three considerations worth keeping in mind:
- Can I pay this? Before you apply for credit, evaluate the overall state of your finances. Consider whether or not you can pay back the entire sum both on time and in full. Failure to meet the expectations of your lender can result in late fees, higher interest, and “black marks” on your credit record.
- How will this debt affect me? From the amount of monthly interest to the length of the loan, awareness is paramount to effective debt control. Always keep the bigger picture in mind, regardless of how large or small the loan in question may be.
- Pay on time all the time! Over 50% of consumers are struggling to pay off their home loans, so be 100% sure that you can meet your monthly obligations. Ultimately, paying off your loans on time is the key to a positive credit record.
If bad debt is affecting you, there are several forms of debt management that can help to reduce your stress levels and improve your financial situation:
- Debt consolidation – where you take out a loan that covers all your debts and pay back one sum each month until all of those debts are cleared.
- Debt counselling – a service provided by financial institutions that facilitates the negotiation of repayments with your creditors. Once an agreement is reached you will have a fixed monthly payment relative to your circumstances. During this time you will be unable to receive any other form of credit.
- Sequestration – debts exceeding assets eventually leads to asset seizure. Your debt is written off, but insolvency is listed on your credit record and your ability to gain more credit will be severely compromised.
Choosing which option suits you is entirely personal. The decision should not be taken lightly, as all forms of debt relief can have significant ramifications when it comes to your personal credit record.
