When people are given advice on debt, the common line of thinking is to avoid it – with familiar sayings like “save for what you want, then pay cash”, and general warnings of the pitfalls of lending.
However, not all debt is equal, according to credit reporting group TransUnion, which says that consumers should be aware of the difference between ‘bad debt’ – which can indeed land you in serious trouble – and ‘good debt’, which is sensible, well managed, and can help put you in a better financial position.
In 2019 precious few of us can afford to pay cash for a home renovation, a car, our tertiary education or even furniture. The trick is to know the difference between good debt and bad debt, and managing your credit wisely.
Student Loans: Investing in yourself can increase your earning potential – and those increased earnings can help you pay off the debt more easily.
Real Estate: There are many opportunities to make money in the property market if you make smart decisions. A simple strategy is buying a home, renovating it and then selling it for a profit – or renting it out.
Car Loans: For many, a car is essential – it’s what gets you to work every day, and if you’re self-employed, it’s a key business tool. But be smart about it, buy with your head, not your heart, or it could quickly become a bad debt that breaks your budget.
‘Bad debt’ is debt that drains your wealth and offers no prospect of paying for itself in the future – like vanity; purchases that won’t help you generate income.
Typical ‘bad debt’ items include:
Clothing & Consumables: Clothing doesn’t increase in value and the interest repayments can leave your finances in a mess. Paying for a holiday, restaurants and entertainment with credit also has no material benefit – all the interest you’re paying could be used to pay for other, more necessary things.
Micro Loans: A lot of people fall into the trap of taking out micro loans to get them through the month or pay unexpected expenses. These loans have extremely high interest rates, and should be avoided wherever possible.
Regardless of the type of debt, it’s important to manage it properly – being smart with your money isn’t about avoiding credit altogether.
Good credit health is about meeting your obligations timeously to maintain a positive credit report. Any failure to keep up with your credit obligations can have a negative reflection on your credit report, which can have a longer-term impact down the line when it comes to securing credit in future.