Good Debt vs. Bad Debt
Many people assume that all debt is the same and a very bad thing. That is simply not true . . . there are times when it is well worth getting into debt, but you need to know the difference between the good and the bad forms of it.
Bad Debt
Very simply put, bad debt is any debt that doesn`t serve a purpose or increase value. You`ll find that in many cases, this is actually preventable. For example, if you spend $2,000 on your credit card and only pay off $1,000, you`ll be charged around 18% interest on the remaining money. Do this too often and you`ll rack up a huge credit card bill that you are helpless to pay off. This is most definitely bad debt.
Other forms of bad debt include investing in things that will depreciate in value immediately after purchase. An example would be shoes. As soon as you wear them out of the store, they are worth considerably less. If you borrowed money to buy them, then you are getting into bad debt. For these things, it is usually best to look at how you can save the amount yourself and then pay it all at once. This is also a good way to make sure that you really want the item.
Another very common way that people get into bad debt is when they purchase a vehicle. A new car immediately drops in value and when you`ve borrowed the money to buy it, your investment is also dropping in value. It`s a difficult position, but the experts recommend opting for a cheaper car that you can afford to pay off all at once, without using loans.
Good Debt
When the debt you incur helps increase your value, that`s good debt. There are many forms it can take. An obvious example here might be taking out a loan to start a business. Since you are using the money to build equity, you`ll be worth more in the future. This is good debt because it will eventually bring in a return. However, there are other ways that you can benefit from borrowing money.
What many people don`t realize is that refinancing can be a form of good debt. It`s often used to pay off bad debt, but the fact that you are reducing what you owe is good. So, if you have 3 credit cards with a total of $20,000 owed and the cards are charging you 18%, it makes sense to take out a home equity loan that will only charge 6% interest. Although the initial amount doesn`t go away, the fact that you are paying 12% less each month means that you are avoiding adding $2,400 to the total on a monthly basis. Since most people end up just paying off the interest on their biggest debts, this can mean the difference between whether you are able to pay off the credit cards or continue in the vicious cycle forever.
Another way to use debt to your advantage is to invest it in a home. Did you know that the average homeowner has a net worth of over ten times that of the average renter? This is a form of good debt because it helps you raise your value overall.
Knowing the difference between good and bad debt is just the beginning. Now you need to put it into practice. Making sure that credit cards are for emergencies only and that you don`t get into more bad debt can be difficult, but with patience, it will pay off and your value will increase.
Terry Mitchell is the owner and operator of Foxrater – http://www.foxrater.com – the web’s top free insurance quote site. It allows people to enter their zip code and compare the rates of auto, homeowners, health, and life insurance companies doing business in their area. Article Source:http://www.articlesbase.com/credit-articles/good-debt-vs-bad-debt-1499473.html
Share this:
Read also:
- How to find out what your credit report is
- New Credit Card Changes – Consumers Win a Victory
- What do the dropping home values mean for your credit lines?
- Things to Consider When Choosing an On the Spot Financing Dealer
- How to Fix Credit Score Fast Process
- How to Cope with Your Huge Credit Card Bills