Published on August 25th, 2014 | by Pete1
The Good, the Bad & the Ugly – What Type of Debt do you Have?
Debt comes in all kinds of packages, but you don’t have to twist yourself in knots to get a handle on it. Some people are downright terrified of getting into debt; some are already in debt and are scared they’ll never get out from under it. The truth is that not all debt is bad news. Really, there are only two kinds of debt; good debt and bad debt. Sometimes it’s hard to tell the difference between good debt and bad debt, and that’s where organisations like Debt Rescue can help.
The Good Debt
Good debt is debt incurred to purchase something that is likely to increase in value. In this way property is a good example of this. While no one likes having a mortgage hanging over their heads, it’s pretty much the standard way to get into a home of your own these days. Say you pay $750,000 for a home, and you borrowed most of the money to buy it. You’re carrying a debt of $700,000, and making interest repayments on that amount. However, because you bought in an up and coming suburb, your property is likely to go up in value; in a decade it may be worth $900,000. If you had to, you could sell your real estate, repay the debt, and have some profit left over. This kind of debt is good debt. It is also often called investment debt.
The Bad Debt
This is the debt everybody warns you about. You may also hear it referred to as retail debt. This is because bad debt is often used to purchase things that do not hold their value like clothes, cars and holiday accommodation. This kind of debt is also often used to buy consumable products such as food and entertainment. If you’re using credit to finance these items you need to reconsider your spending priorities. Credit card debt is often held up as a prime example of bad debt. In fact, credit cards as a vehicle are not bad in themselves and they can serve a useful function as part of a well managed household savings plan and budget. As long as you pay your balance off in full at the end of each statement period, there is nothing wrong with using credit cards. The danger comes when you allow your credit card debt to roll over from month to month – that is bad debt.
The Ugly Truth
Using good debt to pay off bad debt usually leads to ugly consequences. Find a way to use cash to pay off debt – and start with your bad debts. They are usually the ones with the higher interest rates, and offer you the least benefit over the long term. Lastly, carrying too much debt is not a good idea, for the simple reason that it damages your long term financial goals and it can have a negative impact on your credit rating.
That’s the lowdown on the good, the bad and the ugly side of debt. If it’s well managed, debt can form a part of your financial plans and become a constructive part of your wealth management plans.
What type of debt do you have? Plenty of each? What type would you prefer to have? Share your story in the comments box below.