How To Distinguish Between Good Debt And Bad Debt

Debt for many people is a way of life. However, there is so much financial misinformation that many think of debt as a dirty word. There are many differences between what is considered good debt and bad debt, and we are here to clarify them. Before taking on any kind of debt, consider if this debt will have a positive or negative effect on your financial situation.

Good debt is any debt you acquire with the ability to pay back for the term of the loan. All debt is good debt until it becomes unmanageable.

You should only apply for a car loan if you have a stable income to comfortably make the monthly payments. When your car loan is approved, then this is considered good debt because it means an institution trusted you enough to loan you money.

Student loan debt is rarely ever a bad decision. Due to the high cost of college, sometimes you have no choice but to take out a loan. It is not frowned upon because you are pursuing something that will be beneficial to you in the future. It is important that you be responsible when these loans come in and you make all monthly payments on time so your debt remains in the “good” category. If you struggle to pay in a timely fashion each month, then you may want to consider having an income based payment plan or extended payment plan. Make sure you do your research before your loan payments begin. Once you start missing payments, then this can become bad debt.

All debt comes with strings attached. It is only when those strings become uncontrollable and hard to reach that your debt can become bad debt. Remember, all bad debt can flip into the positive if you manage it more closely.

The average household credit card debt is slowly increasing every year. It is when your credit card continues to increase and reach the limit that it becomes bad debt. To ensure it doesn’t stay this way, make your highest interest credit card your top priority. Try your best to get your balance down to $0. If this is too difficult to do in a month, then try for a 3 month pay-down. For example, make your usual monthly payment and then consider contributing additional payments whenever you can.

All bad debt can turn into good debt if you manage it more closely.

If your tax refund is sitting in your savings, this may be a good time to tap in and use a small portion to help pay off your credit card quicker and more effectively. Tackle that debt as soon as it gets out of hand to ensure it doesn’t happen again.

It has been noted from financial experts that the majority of discretionary expenses (needs vs. wants) is non-essential. An expense can be determined as non-essential if you are following a budget plan and motivated to remove the bad debt. Non-essential items that you may want to consider removing from your budget can be: $5 lattes twice a day, take-out lunches 3 days a week, designer clothes, top-tier cable TV stations, season tickets, and other novelties. These non-essential items can cause you to go into bad-debt because they tend to get out of hand. Overspending tends to be a bad habit, but it’s something you can break easily!

..It is important you make all your payments on time so your debt remains in the "good" category.

There is no shame in having debt. Without it, we wouldn't be able to achieve many milestones in life like going to college, buying houses and cars. To ensure your good debt never becomes bad debt, take time in creating a budget for your short-term and long-term financially planning.

Rather than fearing and avoiding your debt payments, embrace them and learn to manage your situation properly. If you prepare for your bills to come in and budget effectively, then your money will be better managed and your debt will never turn on you.