Debt is one of those topics that makes you feel like a dark cloud is hanging over your head. You may begin to feel weighed down, overwhelmed, or like you are drowning in debt. But, what if we told you that there is good debt? Well, better debt. Learn the differences between good debt vs bad debt with this Tuesday Tip.
Good Debt vs Bad Debt
Have you ever thought that some forms of debt can be beneficial? Good debt is debt that creates value, or builds wealth, in the long run. On the other hand, bad debt is debt that depreciates in value over time. So, let’s break it down. What is good debt vs bad debt?
What is Good Debt?
Think of good debt as an investment. These investments can be in your home, your education, or even your vehicle. When managed properly, maintaining good debt can help improve your credit score, make you a more valuable candidate for a job, and show a level of financial responsibility.
Here are some examples of good debt:
- Student loans
- Business loans
Mortgages, student loans, and business loans are all forms of debt that, while they are still debt, contribute to improving your future in some way. For example, taking out a student loan to further your education increases your value as a potential employee, thus helping to build wealth in the long term. However, keep in mind that these debts only create value if you manage them properly and use loans as a tool to be repaid, not a lifeline to stay afloat.
Another way to categorize good debt vs bad debt is that good debt tends to have lower interest rates. For example, student loans are known for their low interest rates, which makes repaying student loans that much easier.
What is Bad Debt?
Now that we know what good debt is, let’s discuss bad debt. Bad debt describes when you spend on things that depreciate in value after you buy them. For example, having a number of credit cards and department store cards can lead to bad debt. Credit cards often have high interest rates, and paying off high interest credit cards can be extremely difficult, especially when only paying the monthly minimum. Thus, as you spend, your debt increases and managing debt can feel impossible.
Some Important Notes
Debt is still debt, no matter the name. Even though they present opportunities, student and business loans do not come risk-free. Make sure not to get in over your head or take out a loan that you can’t manage. The idea of creating value down the line hinges on financial planning to eventually benefit you and your credit score.