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Understanding Good Debt vs Bad Debt

By Ayanda Ndimande, 23 July 2020

Before COVID-19, over 10 million South Africans had bad debt (had missed three or more monthly repayments). Now, in the wake of the pandemic, the situation has escalated – as evidenced by Minister Mboweni’s Special Budget Speech.

In the economic aftermath of COVID-19, the latest data from BankServAfrica revealed that the number of South Africans receiving a salary and wages declined by 13% in comparison to 2019. It is more important than ever to appreciate the difference between good and bad debt to secure financial stability in the long run.

Ayanda Ndimande, Business Development Manager of Retail Credit at Sanlam, urges South Africans to understand good vs bad debt and the impact bad debt can have on a 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 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. Personal loans could also be seen as good debt when it is used for “good” such as revamping your house to increase its value.

The Difference Between Good and Bad Debt

Ndimande 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 financeRetail store accounts
Credit cards can be considered as 'good debt' if used responsibly: Only use it for emergencies and settle your instalments every month If you rack up credit, only pay the minimum and then max out your card again

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.”

Get Professional Assistance

Ndimande says that Sanlam Credit Solutions has recently launched a credit dashboard to assist South Africans to better understand 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 the 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.”

In extreme situations, debt counselling can be critical to turn a situation around. In 2019, Debt Rescue noted that counsellors saw a growth rate of 21% in customers who applied for debt review, vs 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?”


Ndimande 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 is a licensed financial service provider.
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