Have you ever heard the term “good debt”? If not, you need to know about it. While it’s true that living a life of debt is bad in general, for both your pocketbook and your credit scores, there are some debts that can help to build your financial reputation. These reputations can then be used to negotiate better deals, lower interest rates, and other benefits, so this article is going to teach you how to gain it (by understanding the difference between good and bad debt).
Let’s start with the obvious, bad debt. Bad debt is debt that doesn’t actually help you improve credit scores or debt that’s incurred on items that can only lose value instead of gain it. Let’s review some of the most common types of bad debt so you can work to avoid getting into it.
- Cash advances It’s already a bad sign that you’re needing money in advance of your payday, but taking it from a cash advance is all around poor form that can cost you majorly in interest and negatively impact your credit rating. Avoid them whenever possible, and budget so you don’t have to find yourself in these situations as often.
- Cars Cars can be good or bad debt, depending on how they’re used. New car purchases for example are by and large considered bad debt, as they only ever lose value. Consider a used car to improve the nature of a vehicle debt.
- Impulse buys Impulsive buying is probably the main reason people get into debt period, buying an item you didn’t know about but “just got a really good deal on” is a surefire way to skyrocket your debt – and not in a good way.
Now let’s look at the less obvious, what is good debt exactly? Good debt is money that has been strategically spent, and though it may be borrowed it has been done so responsibly, so as to add to your financial reputation and possibly even make money. Let’s look at some examples of good debt to help you really drive home the concept.
- Business loans Business loans are in theory good debt, as they enable you to start up a business that will hopefully earn you that money right back. The point is to borrow responsibly, not more than you can afford, to really take advantage of this form of good debt.
- Mortgages This is a popular type of debt that most people need to enter into at one point or another, home costs are just big. But, as with other types of good debt, mortgages pay off often in helping you to afford an item that can go up in value (a house). Buying intelligently turns mortgages into a good idea.
- Student loans Student loans often have to be taken out to pay for your education. But if your education helps you to get a better job, they virtually pay themselves off. You can take out student debt to make money in essence, in the form of post graduate opportunities.
- Used cars Less cost, and you may be able to get to work now on your own without a buss pass? Used cars can be a great form of debt, they’re often already low in cost and they can help save too – depending on their use.
Now that you know the difference, take a minute to collect personal inventory of yourself here. Is your debt more good or bad? You can likely improve your situation, no matter what it is, just by understanding these relatively simple concepts and taking advantage of them.