The intent behind this article is to reassure anyone who has debt -- that not all debt is bad debt! Many people, at some point in their lives, have to carry the “burden” of debt on their back. Whether it’s for a mortgage, student loan, credit card, personal loan, etc., we typically categorize debt as a burden and a negative aspect of our financial life. At the same time, debt isn’t necessarily something the average individual can avoid completely, but avoiding bad debt is a viable alternative.
Is there good debt and bad debt? If so, what is the difference?
Good debt allows you to invest in yourself, and/or provides an opportunity for greater financial placement in the future. Two examples are student loans and mortgages. The money you are borrowing for student loans allows you to pay for an education that can have a positive impact on your future. By obtaining a college degree, you are opening the door to more career opportunities, which means you are putting yourself in a position to potentially make more money further down the road. In addition, something like a mortgage also provides you with the benefits of good debt and allows for tax deductions on the interest paid on your mortgage. Not only are you borrowing money to provide yourself with a place to live, but you are also borrowing money to take ownership in an asset that may appreciate over time.
Bad debt does not provide any financial benefit to you or investment in yourself in the short or long term. Credit cards are the most common example of bad debt. Based on 2018 statistics, the total revolving consumer credit debt reached $1.027 trillion, as 43% of families report spending more than they earn each month and borrow/use credit cards to finance their short falls, with the average credit card balance being $6,354. Credit cards have benefits, and if used properly, can provide you with rewards and help you establish and build your credit. At the same time, if they are abused, they can be harmful, as monthly payments and accumulating interest can become an issue. In addition, credit cards carry a few risks that could really have a negative impact on your credit score. This includes missing your monthly credit card payments, carrying over credit card balances and having to pay interest, high utilization on your credit limit, and applying for too many credit cards.
In conclusion, there is a difference between good and bad debt. Good debt allows you to invest yourself and your future, while bad debt does not provide any financial benefits. When it comes to financing, whether it’s for meals, entertainment, vacations, etc., do not finance anything you will not be able to afford to pay when the bills come in. When considering a credit card, buying a car, taking out loans, etc., always do your research; make sure it is something you can afford and is something that is financially suitable for your personal situation.
When considering loans and other potential types of debt, it is critical that you are well informed about the loan/product and all the options available to you. Student loans are a very common type of debt that many have, but many lack an in-depth understanding of how student loans work. Amid the student loan crisis, you need to be informed! More information regarding student loans will be covered in depth beginning with our next article.