Debt can have a disabling effect if not managed correctly. But it can also be a great source of wealth.
Debt can be explained in a very simple way. Good debt is when you buy something on credit that has the potential to increase in value in the future, such as a home loan.
Bad debt, on the other hand, is when you use high-interest credit to buy something that immediately loses value, such as using a credit card to buy groceries or other disposable items.
|Good debt||Bad debt|
|Home loan||Credit cards|
|School loan||Store cards|
|Business loan||Vehicle finance|
*Credit: The ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in future.
When does debt become too much?
- When you notice that you’re just adding to your debt pile every month. You’ll only notice it if you keep track of your spending. Don’t have a budget in place? Check out how to do a budget.
- Counting down the days before you get paid? When your debt payments consume so much of your income that you’re living down to the wire, it’s time to do something about it.
- If you and your partner are not on the same financial page, you may be accruing debt separately but may not realise how much total debt you have. Your individual debt may be healthy, but should you be married under community of property, your combined debt could mean you are over-indebted. Read: How to manage debt as a couple.
- When your debt costs more than your home.
- If your net worth is less than zero.
- When your credit score starts to suffer.