Here’s our guide on good debt vs bad debt, differences explained, so you can borrow funds responsibly. As much as we’d all want to pay cash for everything, sometimes we just can’t.
Circumstances may lead us to take out loans or lines of credit. For example, you may need to go into debt due to a medical emergency.
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What is the Definition of Good Debt?
Make no mistake though. There are such things as good debt and bad debt, much like there are healthy foods and junk foods. Good debt has positive long-term effects, while bad debt has negative ones.
Before shouldering a debt burden, check if it counts as good debt or bad debt. There are three good debt characteristics, and your debt must satisfy at least one to qualify.
First, your debt must help you acquire something with rising value, such as a home. Second, your debt should boost your earning potential in the near future. Third, it must be for dire circumstances like debt for a lifesaving medical procedure.
How Can Good Debt Help You?
Between good debt vs bad debt, the former helps improve aspects of your life aside from your future financial situation.
For instance, people take out small business loans to build companies and make more money later. Moreover, people take out mortgages as potentially profitable investments.
Most importantly, debt is definitely good if it helps save a life!
Good Debt vs Bad Debt
Not all kinds of debt are good, as there are bad debts as well. When debating good debt vs bad debt, the former has the opposite qualities of good ones. Often, they aren’t for serious purposes, but people are willing to bear the monthly payments regardless.
Sadly, they usually have high-interest payments that bury peoples’ financial futures in debt.
If you aren’t careful, bad debt may ruin your personal finances. Millions in America alone are trapped in an endless cycle of debt and payments. Their loans accrue insurmountable loads of interest that their incomes simply cannot repay.
They sometimes pay them off with even more debt, but their quality of life always suffers.
What is an Example of a Bad Debt?
To illustrate the disparities between good debt and bad debt, let’s look at some examples. Car dealerships often promote bad debts called auto loans since their vehicles eventually lose value.
Worse, you may have seen payday loans in seedy parts of your neighborhood. These are the epitome of bad debts with their exorbitant interest rates, taking advantage of impoverished folks.
What Debt is Good Debt?
Of course, there are many kinds of good debt, including student loans. With proper planning, borrowing funds for college may grant you a high-paying job later.
Also, credit card debts can be good if you use them sparingly for essential purchases. Even better, you may improve your credit score with diligent payments and minimal credit use.
As we’ve mentioned, some people take out a mortgage since they can’t buy a home with cash. Since shelter is a pretty basic human need, a mortgage definitely qualifies as good debt.
What’s more, their home enables them to access exclusive credit options. For instance, it allows you to borrow a tax-deductible home equity loan. Between good debt vs bad debt, the former can increase your credit options, so it may even improve your credit score.
Even our nations follow economic cycles since they regularly borrow funds. National debts usher a time of prosperity, but it eventually leads to economic downturns.
Countries have ascended and crumbled from their debts, and so will you.
No matter what, good debts and bad debts must be handled carefully. You should only go into debt if it’s for an important reason and if you can truly repay on time. Your finances may still go into the red even without high-interest rates.
Regardless of your choice between good and bad debt, proper spending habits are always important. Debts can help build your future, but they can also crush it under their weight.
Learn More About Good Debt vs Bad Debt
How much debt is healthy?
A healthy amount of debt depends on various factors. Aside from your income and the rate of interest, debt’s effects rely on other factors such as the interest rate and loan type.
What can good debt do to your credit score?
Good debt can help you boost your credit score. They can help you earn more for diligent debt payments that raise your credit rating. However, good debt can still harm your credit if managed poorly.
What are examples of good debt?
Mortgages and student loans are examples of good debt since they can help improve your future finances. However, these are subject to various factors that may alter their effects.