Managing debt is crucial for your financial wellbeing

People take on debt for various reasons – to either buy a house, refurbish a home, get a credit card or lifestyle loan.

There are those who are starting the year on a not so secure financial footing due to debt.

Justmoney.co.za’s marketing manager Shafeeka Anthony says understanding and managing debt is crucial for long-term financial wellbeing.

“It can significantly impact your ability to save, invest and achieve financial goals. January is traditionally when people take stock of their financial situation and decide on fresh beginnings, so this is an ideal time to learn more about debt and take control of your money matters.”

Anthony says to get financial peace of mind, one needs to manage debt and understand the difference between good and bad debt.

He defines good debt as an investment in the future and bad debt as a burden of financial health.

“Good debt means borrowing money to invest in assets that have the potential to increase in value over time, or to generate an income. Bad debt is incurred for purchases that do not contribute to wealth-building or do not provide long-term value,” he says.

Anthony gives examples of good debt:

Student loans: Investing in education can increase your earning potential and long-term career opportunities.

Mortgages: Buying a home can be a wise investment as you’re paying off your own property, which generally appreciates over time.

Home improvement loans: Using a personal loan, or home equity loan (home loan refinancing), to renovate your property can increase its value markedly.

Business loans: Borrowing to start or expand a business can increase personal wealth and profitability.

Vehicle loans: Financing a reliable, value-for-money car can be a strategic move if transport is necessary for your work and increases your ability to generate an income.

He shares examples of bad debt:

Credit card debt: Accumulating credit card debt for non-essential purchases  and not paying it off in full at month-end.

Lifestyle loans: Taking out loans for items with no lasting value, such as tech gadgets, fashionable clothing and extravagant holidays.

Financing a rapidly depreciating vehicle: Financing a car that depreciates rapidly in value and requires expensive repairs and parts, may be a poor financial decision.

Anthony says it is also important for one to understand their credit score and how debt affects it.

“Understanding your credit score is a crucial factor in managing debt. This is a tool that lenders use to decide whether you’re a low-risk or high-risk borrower. Lending institutions such as banks check your score and accompanying report in detail before providing any kind of loan or credit. Your credit score also determines the interest rate you are charged,” says Anthony.

“Managing and repaying good debt has a positive impact on your credit score. On the other hand, accumulating bad debt and failing to make timely payments, impacts your score negatively. Poor financial behaviour makes it challenging to access favourable financing options in the future. Given the tough economic climate, few of us can pay for a car or home in cash.

“Using credit is unavoidable; being able to obtain a loan or bond can make all the difference to your lifestyle. If you can obtain a loan at a favourable interest rate, this adds up to a saving of thousands of rands over the payback period.”

Anthony says there are various ways one can use to reduce debt and advises people struggling with debt to seek help sooner.

“Debt counselling, for example, is a possible solution if you are  over indebted and struggling to keep up with debt repayments. Under this option, a debt counsellor acts on your behalf and negotiates lower interest rates. The process results in a single monthly instalment over an extended payment term.

“Taking the time to educate yourself about debt is a key aspect of managing your hard-earned money. Understanding the difference between good and bad debt empowers you to make informed financial decisions, avoid pitfalls and build a secure future.”

mashabas@sowetan.co.za