You are no doubt asking yourself, is there such a thing as “good debt”? The answer is YES and it is important to know the difference between the two. In actuality, when used intelligently, debt can be of tremendous assistance. So – if you are not sure, how can you tell which kind of debt you have?
What is good debt? Think of good debt as something that actually creates value. Home mortgages would fall into this category because they actually build wealth over time. Home values increase over the years so buying a home is definitely a good purchase to make. Another example of what is considered good debt is to refinance a mortgage in order to get rid of very high rates. You eliminate high interest debt with a low interest mortgage. The result can save you thousands in interest with the added benefits of increased monthly cash flow. If you re-invest your cash flow savings into your mortgage; you can pay off your mortgage sooner!
What is bad debt then? When you make a purchase and the value goes down with no potential to increase in value – this is considered bad debt. An example of this would be purchasing an item considered “disposable” – think electronic gadgets like lap tops or “toys” such as snowmobile and boats etc. This is compounded when such items are paid for using credit cards and then not paid off right away. The situation can get much worse if you have a high-interest credit card. Think of it as not just the purchase you made, but will continue to make until you have your card paid off. When you carry a balance on your credit card, believe it or not, you are actually increasing the cost of future purchases because of the interest being incurred. You end up paying more because of the interest charges and when the value of that purchase goes down – bad debt is created.
Is there an “ugly”? Yup – there sure is. Think of the “ugly” being what bad credit can do to your credit rating. Missed payments can be reported to your credit bureau in as little as 30 days. This can also turn into an unpaid collection. A lower credit score can have a tremendous impact on your financial situation. Best suggestion? Use credit cards wisely and make it a goal to pay off your balance in full every month to avoid paying interest charges. Credit cards are convenient, but they can also encourage bad spending habits that may lead to financial trouble down the road.