Good Debt And Bad Debt, Really?good debt and bad debt

How To Tell The Difference Between Good Debt And Bad Debt

Sure you can make the argument that there is no difference between good debt and bad debt. The simple reason for that is that some financial experts consider all debt to be bad. In many ways, that is true. If your debt is unmanaged it can negatively impact your entire life. Debt affects your credit scores, your available disposable income and the cost of all your purchases.

Debt And Your Credit Scores

Credit scores have become crucial in today’s financial world. A bad credit scores leads to a bad credit rating. The financial industry considers a bad credit score to be a sign of financial laziness. So creditors and lenders increase mortgage or auto loan rates, rental costs, utility rates and the cost of insurance on individuals who have bad credit scores and bad credit ratings. Credit scores even figure into your employment opportunities. Many employers nowadays check out the credit scores of those applying for jobs at their company and with other qualifications being equal will usually chose the individual with the better credit score.

Creditors and lenders get your credit scores from credit rating companies; and these rating companies do not differentiate between good debt and bad debt. They look at your debt-to-income ratio and use it to measure your ability to make monthly payments. If you have too much debt without the right balance of income any excuses you come up with will not matter. You are represented in the financial world by a number, created by a ratio and if you do not fit into the credit rating services ratio formula, oh well. The way creditors and lenders see it, borrowers that have a higher ratio are more likely to have a difficult time keeping up their monthly payments. Whether that is true or not, does not matter. What matters is your understanding of how debt effects your credit score.

What Is Bad Debt?

Bad debt is any debt that is strangling you and your opportunities.

  • Debt from a car loan can be bad debt if the loan is a financial overreach and you cannot afford it. If you have to decide between making a car payment or feeding your family, consider it a bad debt.
  • High interest credit cards are bad news. Credit card debt is only good if you can pay the card balance off every month; thereby avoiding the interest charges. And it seems as if once you get caught up in relying heavily upon credit cards to pay your bills or make ends meet it is so difficult to break up that bad habit.
  • A credit card loan is a bad financial move due to the high interest rates charges. When the purchase price of the item doubles or triples due to the interest rates you have to pay on that debt, it’s bad debt. For example, you buy a dining room set on credit for $800, by the time you add on the interest, that dining room set really ends up costing you $1300. Ouch.

What Is Good Debt?

Racking up minimum payment credit cards or going into debt in general is a bad idea for vacations, eating out or buying stuff. Again, doubling the price tag of things you do or buy catches up to you.

  • Mortgage loans could be considered good debt. The fact is, without a mortgage, most people would be unable to afford to buy a house. What makes a mortgage a good debt is the fact that you are building up equity in the house and someday should able to resell it for more than you paid for it.
  • The same holds true for student loans; without them, few individuals would be able to afford college. And the increased value is the opportunities afforded individuals with a degree in higher education.

Digging Out Of Debtgood debt and bad debt

Now that you know the difference between good debt and bad debt, you are ready to get started, right? Some say it very difficult to dig out of debt. Is it? Yes. Is it impossible? No. Others have done it and with the right approach you can too.

Step #1 – Make a commitment to yourself. When you set any goal, you must be committed to seeing it through, if you aren’t you will get sloppy and then quit. So before you go to Step #2, be sure that you have your personal commitment to digging yourself out of debt.

Step #2 – Set yourself up on a spending plan. Think of it like putting yourself on a diet. When people go on diets they scrutinize their food intake by counting calories, eliminating certain bad foods (cookies) and increasing the quantity of other good foods (broccoli). When you go on a spending plan you scrutinize your spending by putting yourself on an allowance. You earmark a certain amount of money each month for housing, food, entertainment and savings. Once you reach your allotted amount, you are done spending for that month. Easier said than done? Yes, but you can do it.

Step #3 – Go slow. The key to debt control is to start slowly. If you want to make a permanent change in your spending habits, you need to understand the change and be comfortable with it. If you try to change your entire lifestyle all at once, you will most likely drive yourself crazy and maybe even give up. Just like dieters; if they switch from chips and ice cream to veggies and cottage cheese without a transition period they usually end up quitting altogether. Just remember, it took you a period of time to build up your debt so expecting to dig yourself out of it quickly is unreasonable. And if you are like most people, putting too much pressure on yourself leads to self-defeat.

Step #4 – Reward and congratulate yourself on even your tiniest successes. If you do not take the time to pat yourself on the back for accomplishing debt control, who will? When you start breaking the debt cycle, you need to be your greatest cheerleader. It will feel so good to slowly but surely unburden yourself with bad debt.