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South Africans are heavily over-indebted and the realities of a rising interest rate cycle and salaries which do not seem to keep pace with inflation, may not present relief any time soon. Yet, there is good debt and bad debt, and it is critical to understand the difference.

Ayanda Ndimande, Business Development Manager of Retail Credit at Sanlam, says bad debt can seriously impact your credit score. “Debt is officially classified as ‘bad’ when payments are missed, and the account goes into arrears. ‘Bad debt’ can also refer to unnecessary debt that does not increase your wealth in the long term – an example could be a retail store account. ‘Good debt’ is the debt you can afford, that may increase your net worth and generate value on an ongoing basis – like a student loan, home loan and vehicle finance. As well as personal loans that could be used for ‘good’, such as revamping your house to increase its value.

Here, she highlights the main elements of good debt vs bad debt.

Good debt
(Increases your net worth and helps you generate value)
Bad debt
(Does not increase your wealth and is used for purchases that do not have lasting value)
Mortgage loan Credit cards that are not settled each month or the use of the ‘budget’ facility on the credit card
Student loan Payday/cash advance loans
Car finance Retail store accounts
Credit cards can be considered ‘good debt’ if used responsibly: only use it for emergencies and settle your instalments every month Credit cards: if you rack up credit, only pay the minimum and then max out your card again or buy on the budget facility

Having bad debt can adversely impact a credit score. Ndimande adds, “Your credit score is based on a credit report that analyses your debt, income and expenditure to quantify your creditworthiness. Your score is based on information usually sourced from credit bureaus. Having a good credit score will make you a more attractive credit candidate. Having a poor score may jeopardise your chances of qualifying for any credit going forward.”

She says that Sanlam Credit Solutions has recently launched a Credit Dashboard to assist South Africans in better understanding their credit profile and access a credit management coach. “Knowing your score is part one of the journey. The next phase is critical. It can be extremely beneficial to work with a coach to identify next steps as part of a holistic plan to foster long-term financial wellness. A coach can also advise on whether a debt review process could be beneficial. We believe the reassurance of working with a trusted coach can make a powerful difference.”

“It can be extremely beneficial to work with a coach to identify next steps as part of a holistic plan to foster long-term financial wellness. A coach can also advise on whether a debt review process could be beneficial. We believe the reassurance of working with a trusted coach can make a powerful difference,” says Ayanda Ndimande, Business Development Manager of Retail Credit at Sanlam.

In extreme situations, debt counselling can be critical to turning a situation around. In 2019, Debt Rescue noted that counsellors saw a growth rate of 21% in customers who applied for debt review, versus 2018. In a nutshell, debt counselling is a debt relief programme that provides over-indebted consumers with a viable repayment plan to pay back outstanding debt. Some South Africans may need to resort to this option, due to the impact of COVID-19 on finances.

Ndimande says that a credit management coach may also be able to help guide consumers on whether a payment holiday is a good idea. “Payment holidays come with costs. They can often have long-term implications for your finances. So, it’s wise to be wary before pursuing this option. Knowing your credit score helps paint a clearer picture of what your actions need to be. Your Sanlam coach may also give you the confidence to have conversations with your creditors. Even if you don’t take a payment holiday, is there a viable repayment plan that suits both of you?”

She concludes that now is the time to take back control and get seriously savvy when it comes to credit. “Know your score and then commit to taking the requisite actions to address any ‘bad debt’. Work with your Sanlam credit management coach to come up with a viable repayment plan that sets you up for success and ongoing financial wellness. It really is never too late to turn a situation around.”

Sanlam Life Insurance Limited is a Licensed Financial Services Provider and a Registered Credit Provider.

 

 

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