What would you say are the differences between ‘good debt’ and ‘bad debt’? Would you be able to tell the difference and if in debt, do you know what yours are? Would you say you are financially literate or do you prefer to stick your head in the sand?
Good debt is considered as an investment that will grow in value or generate income for the long term and it often has low interest rates in comparison to bad debt. Good debt would be things such as houses or university education – these are considered as advances to your life whether that be through your family or furthering your education. Wonga South Africa recently surveyed over 18,000 South Africans and whilst a majority use credit for good debt, it was shocking to see that more than you think use it for short term pleasures such as holidays, gadgets or fashion:
22.6% of those surveyed mentioned that although they knew the potential costs they would incur from taking out credit, their need for money at that moment outweighed the future implications. As much as 3% didn’t even bother to look at the cost of repayment at all and 27.2% have less than a certain amount of credit available to them. As many as 13.7% have maxed out all their available credit facilities.
These results are quite simply shocking but the same can be said for the world over. Better financial education is definitely needed globally and it is important to consider three key things when thinking about taking out credit or becoming financially literate. What is the money needed for, are the credit repayments affordable should credit need to be taken out and what are the true overall repayment costs once interest rates have been taken into account.
Taking the time to sit down and work out whether the potential debt is good or bad and what advantages and disadvantages they have is essential for the long run – it’s important to know just where we stand if we want to keep in control without things getting out of hand.
Should the need for credit arise tomorrow, would you know how to distinguish between good and bad debt? Would you know how to work out if it is worth it overall? Will the ripple effect be a good one that lasts for years – a family home or a better education which provides you with a better career (with better pay) at the end. Are you still going to be able to reap the rewards of your decision?
Or are the memories going to be the only long term thing you come away with? Holidays do leave us with plenty of happy memories but realistically are only there for the short term pleasure – who wants to still be paying for that dream holiday more than five years down the line? If we can all begin to distinguish between them, we can all start to become financially literate and better educated in money matters.