What is Good Debt and Bad Debt?

Overview

Having debt can be good when it gives you access to various goods or services you otherwise wouldn’t afford. Knowing the difference between good debt and bad debt can save you quite a bit of money and add more value in your life.

Good debt can be regarded as an investment that will grow in value or generate long-term income. Examples of this type of debt include student loans, mortgage loans, income equity loans and small business loans.

Bad debt does not generate long-term income. This type of debt is incurred to purchase things that quickly lose their value. To avoid bad debt, simply follow the rule: If you can’t afford it and if you dint need it, don’t buy it. Examples of bad credit include payday loans or cash advance loans, vehicle loans and credit cards.

Credit cards, for instance, have interest rates that are generally higher than other forms of credit. They are even more costly when a balance is kept.

Getting a vehicle loan can be considered one of the easiest ways to generate bad debt. Cars are expensive and paying interest on a car is simply a waste of money.

Good debts are debts that help you generate value, such as taking out a mortgage, or borrowing for more education. If taking the debt on means that you will somehow make gains in the future, it can be regarded as a good type of debt. Taking out a mortgage to buy a home is a way of generating value in the long run.

Having both good debt and bad debt isn’t such a bad thing. Getting a credit card (regarded as “bad debt”) can help you establish a good credit record while paying a payday loan off on time could help you improve a bad credit record.

The important thing to remember when you have debt is to pay it off diligently and on time.