In the latest episode of our Money Bootcamp series, we discuss the sensitive topic of debt.

While almost all of us need to use credit when it comes to purchasing a home or a car, if it is not managed carefully, it can become a debt trap which undermines all our other important financial goals.

Brian Mphakoanyane from Summit Financial joins us as we delve into credit scores, good and bad debt, as well as what to do when your debts become unmanageable.

Your credit score

Your credit score is crucial in today’s financial landscape. Many factors go into your credit score, such as your payment behaviour, the type of credit that you have, and the length of those loans. It is essentially a summary of your creditworthiness, and is used by credit providers to help them assess how much credit they can safely extend to you.

Brian explains that a good credit score – typically above 700 – reflects responsible payment behaviour and a healthy mix of credit types.

Good debt and bad debt

Not all debt is necessarly bad. Debt can be seen s “good” if it can enhance your future net worth. Think of a mortgage, which allows you to own an appreciating asset (your home), or a student loan, which allows you to enhance your own future earning potential.

Bad debt, on the other hand, is incurred for purposes of consumption, and often leads to financial strain. Think of a high-interest personal loan or credit-card debt, that you take out in order to buy designer clothes or the latest high-end cellphone.

One key takeaway from the conversation is the importance of maintaining a healthy debt-to-income ratio. Brian suggests that keeping debt repayments below 30% of your income is ideal, but many South Africans these days are battling to live within their means, and are thus exceeding this threshold.

What about debt review?

Debt review is a process designed to assist over-indebted consumers, but it can be a prickly subject.

Brian highlights the benefits of entering debt review, such as reduced monthly instalments and the protection of assets. However, he warns that if you choose to go under debt review, you are not allowed to accumulate further debt, which can be a concern for those accustomed to relying on credit.

Another significant aspect of the discussion is the necessity of an emergency fund. Unexpected expenses are a common trigger for debt accumulation, and having savings to fall back on can prevent you from resorting to those high-interest loans or credit-card debt.

Summit Financial offers a product called Summit Save, whereby people who enter into debt counselling save while paying off their debt. Part of your instalment goes towards a savings account, ensuring that if you encounter an emergency and need access to funds, you can draw from that savings account.

This episode is not just about understanding debt; it’s about empowering you to take charge of your financial future.

For more resources and support on your financial journey, visit the Insure Your Future  Money Bootcamp website and explore the tools available to help you manage your money effectively.