Good vs. Bad Debt

In life, there are upsides and downsides to most things - debt included. Debt is something that receives a negative connotation, but virtually everyone has some sort of debt. It seems odd to say there is such a thing as “good” debt, but there is. On the flip side, there is also “bad” debt, which should be avoided. Nobody wants debt, however, good debt works in your favor, while bad debt does not. 

Good debt has the potential to increase your net worth or further you in life in some way. It’s typically low interest and will “pay off” in some way down the road. This includes loans for your education, for a business, a mortgage or other real estate investment. 

Bad debt will drive your credit score lower and weigh you down. Bad debt results in higher interest on loans, which then impacts your cash flow. This includes loans for cars, clothes or other consumables, medical bills, and credit cards. 

Although you can try to avoid taking on any extra debt, it can be hard to avoid, as many big purchases cannot be made without being approved for a loan. Being savvy with your spending will pay off in the short and long-term. Before accepting a loan, make sure you understand all the fine print and have a firm grasp of the interest rate, your payments per month, and so on. It’s important to do your research and take your time versus rushing into a loan with a high interest rate or other hoops to jump through. 

Paying off your debt, whether good or bad, will take some time. It’s important to establish a budget that fits with your lifestyle and allocate funds every month toward paying off your debt. Consider automating payments so you won’t even have to think about it. If you don’t create a plan to pay off your debt, you’ll likely never receive relief. Don’t forget to plan, plan, plan! 

Another simple way to minimize your debt is to quit using your credit card and start using debit. Rather than piling on additional debt, you can simply pay for the item right away so there is no debt claimed. 

Consider working with a professional to better manage and overcome your debt. Getting out of debt will take discipline and consistency, but it’s all about one step at a time, one payment at a time!