What’s the difference between good and bad debt?

Good debt, like home loans or student loans, is an investment that can increase your wealth or income over time. Bad debt, like high-interest credit cards, is used for non-essential items and doesn't provide long-term financial benefits, often leading to financial strain.

How does debt affect your credit score?

In South Africa, debt impacts your credit score significantly. Timely payments improve it, while missed payments lower it. High debt levels relative to income can also harm your score. A good credit score increases your chances of loan approval and better interest rates.

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25 Jun 2024

How to avoid the debt trap

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In this episode leading financial consumer journalist, Maya Fisher-French and seasoned Investec financial advisor, Kgomotso Motloung are back and they dive deep into the world of debt management, offering invaluable insights and practical tips to help you pay off debt and start saving for a brighter financial future. Listen to the full series

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A debt trap occurs when you can't pay off your debt and take out new loans to cover it, leading to a cycle of borrowing more money to meet existing obligations. This often results in escalating debt and financial instability, making it harder to escape the cycle of borrowing and repayment.

Follow these steps to manage your finances wisely and prevent becoming over indebted:

Create and stick to a budget: Track your income and expenses to ensure you spend within your means and save regularly.
Avoid high-interest debt: Opt for low-interest options and pay off balances quickly to prevent costly interest accumulation.
Consolidate your debts: Combine multiple debts into one payment to simplify management and reduce interest rates.
Build up an emergency fund: Save at least three months' expenses to cover unexpected costs without resorting to loans.

Related questions:

What’s the difference between good and bad debt?

Good debt, like home loans or student loans, is an investment that can increase your wealth or income over time. Bad debt, like high-interest credit cards, is used for non-essential items and doesn't provide long-term financial benefits, often leading to financial strain.
How does debt affect your credit score?

In South Africa, debt impacts your credit score significantly. Timely payments improve it, while missed payments lower it. High debt levels relative to income can also harm your score. A good credit score increases your chances of loan approval and better interest rates.