Not all debt is created equal. Debt can be a negative term that many students are all too familar with, but did you know that some debt is actually considered beneficial? Here we discuss the difference between good debt and bad debt.
Good Debt
Any debt that contributes to your education, home or business helps build good credit. These things are investments and are considered a better use of the credit borrowed. This good debt comes from purchasing items that are going to increase in value, like a home.
Not only will this type of debt look better on your credit report, enabling you to be eligible for future loans and credit, but the interest on loans for a home and education is also tax deductible. This type of debt is costing you a lot less in the short term.
Good debt includes:
- Home Mortgage Loan Debt
- Student Loan Debt
- Business Loan Debt
- Credit Used to Purchase Stocks, Bonds, etc.
Student Loan Debt
Most people balk at the idea of how high a person's student loan debt can get. But its worth considering the fact that education contributes to your earning potential. Lenders undertand this and so should you when weighing your options for whether or not to take out a student loan.
If taking on student loan debt means the difference between attending college or not, keep in mind that ultimately this is good debt that's an investment in your future. There are many benefits the come with student loan debt that you won't be offered on any other type of loan.
Bad Debt
Bad debt includes debt you've taken on for things you don't need and can't afford-vacations, clothing, or cars. The worst form of debt is credit card debt since it typically carries the highest interest rates. For more information, see Tips for Managing College Student Credit Card Debt.
Anything you buy that depreciates in value, as well as loans and credit cards with high interest rates, can be considered bad debt. It's best to pay off all of your balance each month if you use your credit cards for disposable purchases or buy them with cash.
Store credit cards are the worst because they tend to have the highest interest rates. Unless you're planning to pay off your entire balance, that 10-20% discount for opening a card at your favorite store won't really be worth it.
Bad debt includes:
- Credit Card Debt
- Car Loans
- Store Credit Card Debt
Why It's Important to Know the Difference
If you're deeply in debt, it's important to learn the differences between good and bad debt so you know which debt to manage first.
It is never a good idea to use your 401(k) or your home to finance your debt. These are investments for your future and they should not be tampered with. Repaying debt with debt is never a good idea. Use cash to repay debts by learning to set a savings goal and create a budget.
It's always best to try not to get too far into debt that you won't be able to manage, but know that some good debt, like student loans and mortgages, can be beneficial to your credit in the long run.