Good Debt vs. Bad Debt

Some folks are buried in debt, others have no debt outside of credit card balances, and others live debt free. Regardless of where you find yourself on this spectrum, debt can be both necessary and risky. Specifically, if debt helps you raise your wealth, it can be good. Meanwhile, debt that is not affordable and does not offer long-term benefits is considered bad debt.

Good Debt

In order to build a strong financial future, you may need to take on good debt. This type of debt serves to move you forward in life. Provided you expect to be more financially secure in the future as compared to the past, good debt can be an essential component to grow your wealth over time.

Student Loans

To continue an education beyond high school, you may choose to finance your education. College degrees are required to land some jobs and college graduates on average make more money in a lifetime compared to non-grads. Student loans can offer better interest rates compared to other types of loans, and interest on these loans may be tax-deductible.

Home Mortgage

Financing a mortgage may enable you to live in a nicer house than you could otherwise afford. Mortgage debt is secured by the value of your home. Knowing how much you can afford to borrow and maintaining mortgage payments is a good use of debt. Additionally, provided your credit is good, you may qualify for a lower interest rate on your mortgage.

Small Business

If you own a small business or have plans to start one, you may find yourself short on cash. Business financing can help you start a business, grow a business, and build credit. Traditional term loans offer funding upfront with a fixed payment schedule and may be secured or unsecured. A revolving loan enables you to draw money as you need it. Interest is paid only on the funds you use.

Bad Debt

Bad debt can have a negative impact on your financial life and cost you more money than the assets purchased are worth. Furthermore, bad debt can cause stress and damage your credit score. As such, steer clear of any debt that can be avoided.

Auto Loans

Car ownership can make it easier to find and keep a job, which directly impacts your earnings potential. However, an automobile will not go up in value or generate future income. What’s more, depending on your credit score, some auto loans carry high interest rates and will take longer to pay in full. The key to auto loan financing is to choose a vehicle you can afford, reduce the loan amount with a down payment, and seek the lowest repayment terms that work with your budget.

Credit Cards

Credit cards can increase your purchasing power and help you build credit history. However, if balances are not paid in full each month, interest and fees accumulate. Avoid skipping payments and strive to use your card(s) for needs, not wants.

Predatory Loans

Predatory lenders use deception to encourage borrowers to take out loans. These loans come with high interest rates, high fees, and longer terms. Be wary of these types of loans which include payday loans and some car loans.

Small changes involving how you take on debt can reduce your stress, improve your credit score, help you save for retirement, and help you finance large purchases necessary during your lifetime. Therefore, focus on making credit decisions that can help you build a strong financial future.