Good Debt vs. Bad Debt
Good debt is an investment in your future, while bad debt is expensive and has the potential to hurt your financial prospects.
Debt is a necessary part of life. You can certainly try to live without incurring any debt. Many people live a cash-only lifestyle. But somewhere down the road you’re likely going to need some sort of loan. Having no debt means you have no credit. Lenders don’t give money to people who have no credit. They’re risky investments.
Learn the difference between the good and the bad.
Good debt is going to help you increase your net worth or net income, or is an investment in your life and your future.
Examples of good debt are mortgages/home equity loans, student loans, and auto loans.
Mortgages and home equity loans or lines of credit are good because a house is viewed as a good investment. For almost the entire time we’ve been living in houses, they appreciate in value. It’s more than likely that your house will be worth more than what you purchased it for when you’re ready to sell.
Student loans are another investment in your future. Once you earn your college degree, you’ll earn on average three times more than someone who only has a high school diploma.
Auto loans are also viewed as good. While cars depreciate in value very quickly. But they allow you to work or go to school so it is adding value to your life.
The biggest factor in determining if a debt is considered bad is if it has a high interest rate. Another issue is that the purchase isn’t adding value to your life. Think of things like discretionary expenses that lose value quickly or aren’t necessary.
Credit cards can be very bad. While credit cards can be great tools to build your credit, they can become costly if you’re carrying a high balance over from month to month.
Moral of the Story
Be smart. It’s important to pay off bad debt first. The high interest rates are going to cost you lots of money if you put it off.
Don’t take on too much either. Not only will it put a dent in your budget, but it will also affect your credit and whether or not a lender will loan you money when you really need it.
Decide whether or not it’s a good investment. If going into debt is the only way to improve your future, like going to school to earn a college degree, then it’s worth it to take out those loans.
Make good choices. Your wallet will thank you later.