We have all heard the word ‘debt.’
It is usually considered a bad thing, but as many of us know, between student loan debt, mortgages, credit card debt, personal loans and everything else. it is practically necessary to acquire debt to function in life.
Before you take on any debt, you should ask yourself if taking on this debt is pushing towards your financial goals, or if it is tearing you from them.
Believe it or not, both good debt and bad debt exist.
Good Debt Vs Bad Debt and How to Know the Difference?
The difference between the two is dependent on several factors, a couple of them being the type of debt and its quantity.
For example, a credit card can begin as good debt.
As you use your card, you can finance large expenses while earning points and rewards.
However, if your card is not managed appropriately, it can quickly become a high-interest bad debt.
Good debt is low-interest debt that helps you.
It can help you by increasing your income or overall net worth.
It is important to note that too much debt, of any kind, can soon become bad debt if not appropriately managed.
Student loans are an example of good debt.
Typically student loans are looked at as an investment in your future.
Another plus is that unlike many credit card debts, student loan debts carry a low-interest rate.
To keep your student loans within the good debt category, it is helpful to aim for your student loan monthly payment to stay below 10% of your projected monthly income after taxes after graduation.
If your student loan debt has already become a bad debt and you are ready to try to get it under control, consider looking into repayment options like financing or income driven payment plans.
Mortgages are one of the most significant and most important financial decisions you will make throughout your lifetime.
Having a mortgage means you have decided to settle down and to be your journey to home ownership. Your mortgage payment should not exceed 36% of your total income.
If you need to get out of a mortgage debt that is too much to handle at this time, it may be helpful to downsize, move to a lower cost area, or refinance your home to make your debt more manageable.
Most of us have had to commute for work, and we know just essential having a car is to keep up with the hectic nature of life.
A good guideline to follow in regards to good debt is that you should keep the total cost of a car, including the loan payment within 20% of our actual total income.
You should try to limit your payment plan to four years or fewer and do your best to leave 20% down.
Bad debt is expensive debt that drags into a financial pit.
It most often shows itself in the form of high or viable interest rates especially on items or purchases that depreciate over time.
It is also common for bad debts to merely be good debts that get out of hand.
A good example of this is credit card debt.
If you have a high-interest rate on your credit card, it is not a problem if you are paying your balance off on time.
But if the high-interest rate debt begins to accumulate on your card, you could be in trouble.
High-interest rates are usually great than 20% and can drastically increase the overall cost and payment of your debt.
If you find yourself paying all you can monthly, and you feel like there is no change happening, do what you can to decrease or eliminate your spending.
You can also try David Ramsey’s snowball method or the debt piling strategy.
If your credit is decent, you can also request a balance transfer credit card.
Otherwise, you can always seek professional assistance from a debt management agency.
Another form of bad debt is unnecessary personal loans.
These usually include large impulse buys and can be a costly habit.
Taking on debt for things like a weekend getaway or a new wardrobe can quickly become an unbreakable and highly expensive habit.
If you are going to continue to take out personal loans, it may be better to focus them on specific goals like consolidating debt.
Refinancing your loan if it is expensive and out of control is also an option.
The last bad debt is a payday loan.
These loans can quickly turn toxic with interest rates upwards of 300%.
As soon as you take the loan, you have most likely put yourself in a situation that is unaffordable.
Payday loans are typically used for emergencies.
They are supposed to be small-amount, short-term goals that are meant to be paid in full with the next payment.
They can quickly become bad debt if you are taking out more substantial amounts and taking a long time to pay them back.
Financial experts caution the use of payday loans all together as they are a sure way to begin a vicious debt cycle.
If you need an emergency loan, consider possibly seeking aid from family members, or taking a loan from a credit union instead.
Before you take out any loans, it is important to consider what kind of debt you are about to take on.
Will it help you achieve your goals or will it be outrageously expensive and derail your financial goals completely.
Good debt includes things that are an investment in your future and can potentially help you to move forward in life.
This includes things like student loans or a mortgage payment.
Bad debt hinders you from achieving your financial goals and usually is associated with high-interest rates.
With bad debt, in the end, you end up paying far more than you ever owed initially.
If possible, it is best to avoid taking on bad debt, so that instead of hindering your financial future, you can help it.
If you are at a place where you need help with your debt and things have gotten out of control, most people consider bankruptcy or debt settlement as options.
However, it is important to know the difference between the two and how they can both affect your financial situation.
So what good or bad things have you seen when it comes to debt? Just leave a comment below with some of the bad or good debt you have seen.
Schedule a free consultation today for a risk-free debt assessment. The only thing you have to lose is your debt.