Not all debt is equal. Some debts contribute to the well-being of your credit profile, while others can be damaging. Understanding the difference can help you navigate debt to your advantage. Here are a few tips to expand your knowledge.
what is good debt?
Good debt is debt that potentially has a positive impact on your finances. Some debts could be a form of investment or a means of financial advancement. Debts that count as investments include taking out a mortgage on a property, business loans, and student loan debt. Such debts could enable you to make more money in the future.
alternative debt for improving your credit
Certain types of debt can help you repair your finances. This list may include credit builder loans, refinancing loans, or debt consolidation loans. These debts are aimed at improving your credit score or helping you to pay off existing debt faster. Be sure when refinancing or consolidating, you’re lowering the interest due. Compare loan options for consolidating here thebalance.com).
what is bad debt?
Bad debt is debt that is unnecessary and likely to cause harm to your finances.
Arrears are the most obvious form of bad debt – this is when you fail to pay bills on time. You’ll likely be charged late payment fees and your credit score could suffer as a result. These types of debts should be avoided through strict budgeting or by warning creditors in advance (some bill providers won’t charge you a late payment fee if you tell them early enough that you won’t be able to pay to provide that you’ve got a reasonable excuse).
Taking out debts for luxuries that you could otherwise save for is also a form of bad debt.
This includes borrowing money for clothes, vacations, or a sporty car. Saving up for these things instead of borrowing money for them could reduce the need to pay interest fees and the luxury is likely to be more rewarding.
the grey area
Not all debts are easy to categorize as good or bad. It depends very much on who you borrow from. A mortgage for instance is often seen as good debt – but it’s possible to be ripped off by a bad mortgage deal. This is why it’s worth always shopping around and using sites like mortgagequote.com so that you can get the best quote. You also want to make sure that the property you’re buying is a secure investment and not something that is going to cost you more money in the future.
Borrowing money for emergencies can often be a grey area. After all, what counts as an emergency? A loan for car repairs could be an emergency if the car is essential to your livelihood, but less so if you rarely drive your car. Some emergency costs can be avoided by planning ahead, while others are very difficult to prepare for.
If you do have to take out a loan for an emergency, try to avoid high-interest payday loans – you could end up spending huge interest rates in the future if you opt for these loans. Instead, look for low-interest loans and credit unions which may offer perks such as the ability to start saving while you borrow.