Know the Difference Between ‘Good’ and ‘Bad’ Debt

Whenever we talk about debt it’s usually negative and in most cases for good reasons! Credit card debt might be preventing you from saving money and high student loan payments may leave little room for traveling and experiencing the finer things in life, but the truth is that not all debt is created equal. We usually put debt into two camps: good debt and bad debt.

The hard part is drawing a line between the two, because it’s easy for bad debt to masquerade as something positive.

“Bad” Debt
Credit cards are typically the poster child of bad debt, because they allow you to make purchases you think you need – like this season’s newest heels – which you can’t really afford, but before you cut up all of your credit cards remember that if they are used wisely, they can help you build a healthy credit score, which will put you in the running toward getting the best rates and terms on big-ticket items, such as a mortgage.

Credit mismanagement, such as charging high balances, making late payments and opening multiple credit accounts that you don’t need, is what lands you in trouble. So before you swipe your credit card, ask yourself if your purchase is really helping you, or hurting you.

“Good” Debt
Lines of credit that help you get ahead in life are often classified as good debt. A mortgage or auto loan are the first things that come to mind, because these installment loans add a mixture of credit to your credit report and allow you to build equity or own an asset. However, like credit cards, it all comes down to how you manage it.

If you’re thinking of buying a new car or purchasing a home, you might envision yourself driving with the top down or pulling up to your large dream home. However, taking on more than you can really afford can quickly turn your good investment into a financial burden and leave you grasping at straws.

When it comes to managing your credit, remember that any debt can be good or bad. The factor that defines them all goes back to how you manage your accounts. Live within your means, make regular payments and discipline your spending to stay on top of finances and accomplish your goals.