Good Debt, Is there Such a Thing?
Most of us differentiate debts based on two broad categories of good debt and bad debt. But, in today’s financial scenario debt doesn’t fall neatly into these categories. Generally speaking, debts are good if borrowers can handle them well and bad when they don’t repay them on time. However, there’s something called good debt and bad debt.
What is good debt?
Good debts are considered as investments. That is, debts are good when you utilize them to make more money. Good debts help you generate money or it increases the value of your money over time.
Some examples of good debts are – mortgage, student loan, business loan or investments.
Why these debts are good
Consider this: You are taking out a student loan to fund your education so that you can get a good job after completion of your college. In other words, your educational qualifications increase your value as an employee that’ll help you earn a decent amount in the near future. Since it gives you the opportunity to earn money, a student loan is considered as a good debt.
What is bad debt?
Bad debts don’t produce income, decrease in value and are hard to recover. In short, debts that make your financial life miserable are considered as bad debts.
Some notable examples of bad debts are – credit card, auto loan, 401(k) loan, consumer loan and payday loan.
Why these debts are bad
Consider this: Purchasing a car is no doubt expensive. But, the value of a car depreciates with time. If you sell your car, you won’t get bang for your bucks. Since you won’t recover the amount of money you’ve invested at the time of buying the vehicle, a car loan is considered a bad debt.
How to make the most of good debts
Never expect good debts to improve your financial condition just because they’re called good debts; or, think those good debts will boost your credit score. Drawing these types of conclusions are unreal.
A good debt won’t reward your finances unless you master the tricks to make the most of them.
Good debt versus bad debt scenarios and the tricks to handle them:
Handling student loan debt:
If you find it hard to pay off your student loan after meeting all your necessary expenses, ask for a raise. Or, enroll in a student loan repayment program and get rid of your debt once and for all.
Managing your mortgage:
A house is your biggest asset. Since the value of a house increases with time (though it may decrease rarely due to economic crisis), use it to make more money. If you’re unable to keep up with the monthly mortgage payments, rent out or sell your home at the best rate.
Using business loan profitably:
You have to calculate both profit and loss when you’re doing business. So, whenever your business starts generating money, make sure you repay the business loan first. Never delay, as a loss may hit you anytime.
Investing in stocks and bonds is a great way to grow your money. But, don’t overlook the risks associated with it. The investment market can crash anytime. If you’ve received a huge return of your investment recently, save most of the amount and invest the remaining.
How to transform bad debts into good debts
As I have mentioned earlier, there’s nothing as such called a bad debt. For instance, if you pay your credit card bills within each billing cycle, it’ll help you improve your credit score. And, if you’re delinquent, your credit score may drop and you’ll be hit with charges like late fees, more interest payments, and so on.
Check out how you can manage your so-called bad debts better with these following tips:
- Get good financial education
- Exercise personal finance management
- Get disciplined with your finances
- Consult a financial expert
- Make a realistic budget and stick to it
- Save more money to pay back debts
- Repay credit card bills within each billing cycle
- Create a debt repayment plan and use the Debt Lasso method to pay it off faster
- Prioritize your debts
- Make more money to repay debts
One last piece of advice . . .
There’s nothing called a good debt and a bad debt. If you don’t pay back your debts, it’ll take a toll on your financial peace of mind. And if you repay your loans successfully, it’ll make your finances happy.
So, it’s up to you how you want to manage your debts.
More help for you to get out of debt:
One response to “What To Know About Good Debt and Bad Debt”
I also believe most debt is bad. Unless it serves a good purpose, like helping you grow your net worth or get a better paid job, getting into debt is not a good idea.
My significant other and I actually try to live a frugal lifestyle and avoid debt at all costs! The only kind of debt we’re willing to jump head first into is a mortgage. We’re not yet ready to buy a home, but when we’ll decide to make the big step we’ll definitely consider taking out a mortgage loan.