Many people think of debt as a bad thing, and in many cases, they’re absolutely right. However, there are several instances where debt can be a good thing, and can help you achieve your financial dreams. Here’s a primer on the difference between good and bad debt.
The Good Debt.
Good debt — if applied correctly — can help you create a better lifestyle for you and your loved ones. Mortgages are a fantastic example. Most people could not afford to pay for a house in cash, and thanks to the responsible use of debt, they can purchase their own home and enjoy the tax benefits that come with home ownership.
Car loans can also be good, for similar reasons. Most people need a vehicle to get to work (in order to make money and pay all the debts!) and are unable to pay for a car in cash.
Loans for investment properties are a third example of good debt. By taking a mortgage on a house and renting it out, you are effectively leveraging debt to increase your assets.
Bad Debt Defined.
Debt can be murderous, especially in the form of credit cards with interest rates as high as 30%. If you find yourself taking on credit card for items that do not appreciate – such as steroes, CD players and computers – you are fighting debt every step of the way.
Your assets could become at risk if your debt is unmanageable. It also hurts your credit score if you miss payments, which in turns raises your interest rates both now and in the future. Higher interests make it less likely for you to pay them back on time, which again lowers your credit score and again increases the interest rates which lowers your… you get the idea. It’s a vicious cycle, and should be avoided at all costs.
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Tags: credit scores, debt, debt relief, finance, investing, Money
