Tajikistan South Africans are among the world’s worst offenders when it comes to personal debt: Credit payments consume 75% of monthly income for half the population–and much of it is related to heavy credit card use. Officials in the country believe the core financial literacy problem is that many people there do not understand the difference between good debt and bad debt, which are concepts that confuse many others around the world. Yet the difference is both plain and simple.
Good debt can be repaid without undue hardship and contributes to financial stability; it builds net worth or generates other measurable value. A mortgage is good debt because real estate is an asset that appreciates over time. Reasonable amounts of student loans are good debt because an education is likely to result in higher income. Bad debt, on the other hand, diminishes financial stability; it is difficult to repay and provides little more than brief enjoyment–like a budget-busting vacation or large impulse purchase. Often, bad debt is carried on high-interest credit cards, compounding the ill effect.
A number of government-led financial education initiatives are underway in South Africa, focused on helping individuals identify and minimize bad debt. The Banking Association of South Africa’s StarSaver financial literacy program sends volunteers from the banking community into schools to reach children with the message and encourage them to become lifelong savers. The Wonga Money Academy offers a series of online videos to help people make the right choices when it comes to the four pillars of financial literacy – debt, saving, budgeting and investing.
Government and civic leaders hope these measures will push individuals away from bad debt so that they have more resources to service good debts that will help them build a stronger financial future. Different nations have different needs when it comes to financial education, and while the good-debt bad-debt problem is universal South Africa has identified it as the nation’s key personal financial literacy issue.