Breaking Bad Debt.

Your debt problems keep you up at night. People often don’t know where to turn and end up feeling isolated and ashamed. Of course, the solution for all these feelings is to break the bad debt cycle and get out of debt. At Credit Health, we understand that it’s not always that simple. Sometimes, you need a little help.

What is bad debt?

Debt is generally classified as “bad debt” when it is or becomes unaffordable for an individual to manage. Many unnecessary items, including cars, smartphones and luxury holidays are, however, also considered to be bad debt. They either depreciate in value almost immediately, or they hold no value at all.

Bad debt tends to drain your financial resources. Bad debt does not end up paying for itself in the long run. Some examples of bad debt include:

  • Credit cards - Unless you’re using a credit card wisely (most of us don’t). Credit cards have notoriously high interest rates. If you don’t pay off the full amount every month, the money owed in interest can quickly accumulate and outweigh the value of the asset purchased.
  • Store cards - These are a shopper’s worst nightmare and, like credit cards, come with high interest rates.
  • Payday or short-term loans - These short-term loans are intended for small amounts taken out over a short period of less than 30 days. Interest rates on these loans can be astronomical and quickly escalate out of control.

Before borrowing money, you should always consider the following:

  • The repayment amount - Does the total amount and monthly repayment amount fit within your budget? If not, then it’s best to rather try and save up to purchase this item.
  • The interest rate - Interest rates vary depending on the type of loan and your lender. You should always explore your options in terms of lenders and aim for a lower interest rate when borrowing money.
  • The repayment term - The longer the repayment term, the more interest you land up paying. Additionally, your circumstances could change, making it difficult to repay your debt obligations.
  • Late payment penalties - While some creditors may be lenient on late payments, others are not and can charge you a fee for each late or missed payment. This can quickly cause your debt to grow out of control.

How does bad debt come about?

Debt doesn’t quietly creep up on you in any subtle form. Debt faces you head on and challenges you:

  • “Take this.” “Get that.” “I want it.” “I have to have it.” “Discount.” “Sale.” “Limited Offer.” “Now, Now, Now!”
  • In a typical scenario of trying to keep up with the Joneses, or perhaps trying to out-do the Joneses, consumers tend to deplete their credit cards and credit accounts, and then top it off with personal loans and loans from unassuming family members and friends.
  • Then, in order to cover payments on these debts, more debts are accumulated. To add to the metaphoric cherry on top, fees and interest are added to the outstanding amount. Eventually, the hamster wheel of debt becomes a roller coaster ride (without the thrill) which has lost its ability to slow down. The never-ending spiral of debt seems to bury consumers, offering them no reprieve and no effective way out.

How much is too much debt?

Keeping an eye on your finances is important, especially if you have debt obligations each month. A great way to do this is to work out your debt-to-income ratio (DTI).

A DTI ratio is one of the many factors that credit providers look at when deciding whether or not to lend you money. It’s not just credit providers that should be interested in this information. Your DTI can be an effective tool to help you monitor your income and expenses, giving you a better idea of where you potentially need to cut back.

How to work out your debt-to-income ratio (DTI)

Firstly, you need to add up all of your monthly debt obligations. This will include any mortgage repayments, loans, credit cards or any other form of debt. You will only get a true reflection of your DTI if you include ALL of your monthly debt obligations.

The next step is to add up all of your income. Again, it's important not to miss anything to ensure you get an accurate DTI.

After you have added up all of your income, it’s now time to do the calculation: Divide your monthly debt by your monthly income and multiply by 100. The result is your DTI as a percentage. It’s a simple equation, as outlined below:

Debt ÷ Income x 100 = DTI.

While there’s generally no “perfect” DTI ratio, credit providers prefer to see a debt-to-income ratio smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage.


  • Total debt: R15 000
  • Total income: R45 000

Debt ÷ Income x 100 = DTI

(15000 ÷ 45000) x 100

DTI = 33.33%

Tips for getting out of debt

Debt is not the pit of doom and gloom that it appears to be. Take a step back, consider where you are right now and be honest with yourself: do you really want to stay there, or would you like a way out?

Write down your debts and prioritise them

The first step in taking control over your debt is to make a note of all the money you currently owe. Yes, this may seem like a terrifying task, but it is necessary as it shows you exactly how much money you owe. Assessing your debt will help you keep track of all your debt ensuring that you don’t miss any payments.

Now that you have a full record of all your debt, it’s time to start prioritising them.

Prioritising your debts isn’t about paying back the larger ones first. Instead, you should make sure that you keep up to date with the most important payments, including your rent, mortgage or utility bills. This ensures you continue to have a roof over your head, water and electricity.

Next, you should pay off the debts with the highest interest rates. This will ensure that you don’t end up paying way more than you need to.

Create a budget

A budget is extremely important, not only for those who are trying to get out of debt, but also for those who are working towards their savings goal. You need to know exactly how much money you have coming in and going out.

Take a look at your expenses and try to find ways to limit your spending. Trying to cut down on those morning coffees or take away meals is a great place to start. It’s also a good idea to look around for cheaper alternatives to the services you already use. Most of the time we don’t even realise that we are paying more for our wifi or phones than we need to be.

Developing a smart budget plan will leave you with more cash in your pocket at the end of the month. This could go towards repaying your monthly debt obligations or saving towards your next financial goal.

Look for extra income

If you’re in a position where your regular income is not making ends meet, it might be time to look at ways to supplement your income.. You can do this in a number of ways: this doesn’t necessarily mean that you must get a second job.

Websites including Gumtree, Facebook Marketplace, and other platforms are designed to help you boost your income by selling unwanted goods. This could be a huge help for people who are trying to get out of debt. Even if it’s just a short term solution that could prevent you from paying even more interest.

Take care of your mental health

Although it’s not really a tip for getting out of debt, it’s important to remember to look after your mental health and emotional well being during difficult financial times. It is common for people to feel stressed and embarrassed due to debt. You should, however, never feel embarrassed or ashamed, there should never be any shame attached to debt.

If you do feel that you are struggling to cope, you are not alone. Reach out to friends and family and explain your situation. Healthy life choices and a regular exercise routine can help keep your mental health in a good place, which will ultimately lead you to be more successful in getting out of bad debt.

For more help and advice on getting a grip on your debt, contact Credit Health.

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