Good Debt vs. Bad Debt

Ideally, your ultimate budget goal should be to live debt-free and have savings to spare, but life doesn’t always work out that way. While aiming to not have any debt should be at the top of your list, some debt could be considered better to have than other types, like student loans or a mortgage. This type of debt can improve your credit score and build wealth over time. However, debt becomes an obvious problem when it is no longer controllable or is wrapped up in credit cards and other unnecessary, high-interest loans. Hopefully this never becomes an issue for you, but consider some of these signs that might indicate your debt is becoming a problem, and tackle it head-on right away…

Most of your debt is “bad”. While technically no debt is ever considered “good” to have, some of it is more beneficial than others. Loans for tuition or for a mortgage on your house are generally better to have because you build wealth over time, and you’ll have something to show for it once they’re paid off (and they can be a bit unavoidable). On the other hand, credit card debt is usually accrued by purchases that aren’t really necessary. Plus, the interest rates tend to be much higher, which makes your debt grow even faster.

Your credit score has taken a hit. Having debt doesn’t necessarily mean you’ll have a bad credit score. In fact, consistently making payments on that debt HELPS your score. However, if your debt gets too high, it will negatively affect it. Having a low credit score can affect your future chances of securing a loan, should you need one.

You’re not paying on time, or you’re unable to meet the minimum payment. This ties in with your credit score, noted above. Missing payments also means that you’re falling behind, which ultimately means that your debt will keep growing and growing, from both added interest and additional spending that you couldn’t otherwise afford.

You have limited or no savings. If you’re contributing all of your allocated savings or extra money to paying off your debt, you’re in a pickle. It’s important to have savings because one unexpected emergency can dig you even deeper into a debt hole, if you’re not prepared for it. Adding that to a large debt can put you in an even worse position.

It affects your personal life. I’m sure everyone has had an argument about finances with a friend or family member at some point in time. Your debt shouldn’t be a strain on your relationships. If it is, it’s time to come up with a better plan for paying it off, or creating better spending habits to prevent another build-up later.

Is debt a burden in your life? What kind of plans have you made to pay it down or eliminate it completely?

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HOW IT WORKS