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.