They make it so easy, don’t they? They give you a store card and you can just go crazy, shopping to your heart’s content. It’ll backfire on you in the end. But they don’t care. They just keep adding interest and admin charges to your account balance (because you’re only paying the suggested minimum monthly amount, not realising that it’s barely making a dent in what you owe). And when you start skipping payments, they simply turn you over to their lawyers, who add their exorbitant fees to your debt, which is by now unmanageable.
Worst of all, you have nothing to show for it, because your credit was on consumables or goods that plummet in value as soon as they leave the shop.
Do you know the difference between good debt and bad debt?
Good debt is a loan you have on something that grows in value, such as a property. A student loan is also considered good debt, because you’re using it to invest in yourself.
Bad debt is money you borrow to buy things you consume or that decrease in value. The only type of bad debt that is unavoidable for most people is vehicle finance. Debt on the following four categories of items should be avoided as far as possible.
1. Clothes
If you want to live within your means, your clothes expenditure should be incorporated into your monthly budget. You may be much more limited in what you can buy (and wear), and you may have to give expensive designer brands a miss. But spending on clothes only what you can afford each month will teach you how to be disciplined with your money.
2. Furniture
Finance charges on items such as lounge suites bought on credit are outrageously high. You can end up paying more than double the selling price if you pay it off over a few years. If you’re starting off, rather scour Gumtree and second-hand shops for items to buy cash. With a bit of creativity and a coat of paint, you can give old furniture new life.
3. Luxury holidays
It’s all too easy to whip out your credit card when paying for a holiday package to some exotic destination. But the higher repayments will be tough on your monthly budget. Rather do it the other way around: put aside money each month in an account which pays fair interest until you’ve saved enough. You’ll enjoy the trip a whole lot more.
4. Groceries
This is the biggest no-no of all. If you are going into debt just to feed yourself, you are in serious financial trouble. Supermarket chains are highly irresponsible in letting you do this on their store cards, but you could equally be doing it on a credit card. To avoid getting into debt on your credit card, you need to pay back the entire amount owing every month.
Read this and other articles on how to manage your money in our latest IOL MONEY digital magazine, available free on the Issuu platform, here.
PERSONAL FINANCE