Good debt vs bad debt
How you feel about debt boils down to personal experience. Although running away in an attempt to avoid it won’t make it vanish – it may come as a relief that not all debt is bad. Senior director of consumer interactive at Transunion Garnet Jensen sheds some light
The stage you’re at in your life significantly affects your relationship with debt.
If you’ve just entered into the workforce, receiving a monthly pay cheque could also mean you’re receiving calls from creditors, offering you anything from phone contracts to clothing accounts, and vehicle financing. If you’re wary of accumulating debt, your natural response will be to decline their offer, but if you’re more inclined to act impulsively, you could find yourself in trouble. First, you need to be able to differentiate between the kind of debt that increases your net worth and the kind that drains your wealth, also known as good and bad debt. ‘Good debt is a sensible investment in your financial future because it helps you make money. Bad debt, on the other hand, won’t help you generate an income – vanity purchases are a good example,’ explains Jensen.
There are various ways to build your credit record, without accumulating debt. Insurance contracts are a good option and form part of your credit profile. ‘These include funeral polices, life cover and short-term insurance.
It’s better to enter into one credit agreement you can maintain, as opposed to committing to multiple accounts that you can’t keep up with,’ he says. Once you’ve secured credit, building and maintaining good relationships with your creditors is the next important step towards ensuring a good credit rating. An easy way to do this is to honour your debt commitments.
‘If you find yourself falling behind on a payment, get in touch with your creditors and let them know,’ says Jensen. Tackling debt head-on means creditors will be more likely to trust you, which will increase your chances of securing credit. ‘Failing to do so will probably increase the amount of money you have to pay for credit,’ he warns.
‘It could even affect your chances of getting a job – especially if you work in finance or any other industry that involves dealing with cash responsibly.’
Does the idea of paying for everything in cash, up front, appeal to you? Jensen reminds us that only a few people can afford to pay the full amount in cash for a home, a car, an education, or even furniture. ‘Having credit is essential for navigating modern lifestyles,’ he says. Want a good credit profile? Pay your home insurance policy on time, or pay off a car you’ve financed or a mortgage. It acts as a gateway to accessing more credit products.
‘If you wait until you’ve saved enough cash to buy a house, you’ll probably never own one. The trick is to use credit wisely. Being smart with your money doesn’t mean avoiding it altogether.’
What if you didn’t get off to a good start and you’re already drowning in debt, caught up in a vicious cycle of borrowing more money to settle your debts? Jensen says you can break this cycle by successfully managing your finances and seeking the help of experts such as debt counsellors. ‘To avoid having to borrow from Peter to pay Paul, have an honest conversation with your creditors, who’ll help you devise a payment plan that takes into account the fact you’re over indebted,’ he says. And if you have to depend on credit cards to maintain your lifestyle, he offers the following advice: ‘paying for holidays, eating out and entertainment with a credit card also has no material benefit – all the interest you’re paying could be used to pay »
Good debt is a sensible investment in your financial future because it helps you generate an income
for other, more important things. This type of credit is known as bad debt because it negatively affects your wealth. It should be avoided at all costs.’ If creditors refuse to lend you money due to your bad credit rating, Jensen advises fixing your credit score. Adjust your budget and demonstrate your ability to pay for things on time. For a complete picture of your credit history, you’ll need to access your credit report.
Jensen explains that a credit report is a document compiled by credit bureaus on a credit-active consumer’s profile, which details, for example, your credit and insurance policies. ‘It’s a recording of both good and bad payment behaviours. Lenders use credit reports to either grant or deny consumers access to credit.’
how do i access my credit report?
You can get a complete picture of your credit history from Transunion, delivered in a single, easy-to-read report, by visiting transunion.co.za. You can also visit other credit bureaus in the country – once a year, each bureau has a mandate to issue a free credit report to consumers. how do i resolve issues such as defaults or a black listing? once you’ve settled a default payment, it’s usually removed from your record. Credit bureaus like Transunion can also help you with this. If you want to speed up the process, you can log a dispute.
You need to provide all relevant paperwork, including the paid-up letter from the credit provider that blacklisted you, because if your case is found to be invalid or incomplete, it stays on your credit report for the next year. once your dispute is logged, a review takes 20 working days.
how do i improve my credit rating
personal information, such as your employer, age and address and demographics, has no bearing on your credit rating at all. Here are five factors creditors consider:
1. Your payment history. A record of your payments over the last two years. If you’ve missed payments, this will harm your credit rating. 2. Adverse listings. These are defaults (when you’re more than three months behind on a payment), judgements and administration orders.
3. Number of enquiries. This refers to the number of enquiries made about you by credit providers over the last year. A high number will have a negative effect on your credit rating.
4. Credit portfolio. The types of credit you’ve engaged with, secured and unsecured, and your usage habits. Don’t overuse store cards.
5. Length of credit history. How long you’ve been using credit. The longer your history, the better your rating.
how long will bad debt stay on my credit report – and what can i do about it?
Default payments appear on your credit report for one year, or until you’ve settled your debt and received confirmation from the credit provider. In terms of the national Credit Act, a credit provider must give you 20 working days’ written notice before reporting your default payment to the credit bureau. A court judgement stays on your credit report for either five years or until it’s paid in full. If you don’t defend the legal summons issued to you or pay the amount claimed by the credit provider, the court will grant a judgement.