Is there Good Debt?
Yes, there is such a thing as good debt. There are only a few types of debt that fall into this category, but it's important to make the distinction. Some examples of good debt are:
* Debt incurred to buy a home - Owning your own home has numerous benefits. But the reason that this is considered a good debt is because a home is an investment. It gains value instead of losing it, so you're putting yourself at an advantage by going into debt as long as you keep your payments current.
Borrowing money for college is also an investment ? in your education. By educating yourself you give yourself more earning power. This is an instance when taking on debt is a wise choice.
If you obtain a start up loan for a business venture this can be good debt. Again you are borrowing in order to give yourself earning potential. Of course you are always taking a chance when going into business for yourself, but often it is worth the risk and the necessary debt incurred.
More often we talk about debt that is not so good. Some examples of this are:
Financing a car ? unlike a home your car depreciates rapidly. That means you are not investing your money with the potential for a greater return in the long run. The money you spend is gone.
Almost everyone has and uses credit cards and they are convenient. However credit card debt is considered bad debt. Typically the purchases made on a credit card are things that will not earn you money over time. Credit card purchases are rarely an investment.
Another bad debt is borrowing money for personal use such as to purchase higher priced items or maybe to fund a much needed vacation. These are at times necessary but will not earn you money in the long run. Since they are not an investment this is not good debt.
Just because a debt is a so-called good debt, that doesn't mean it can't get us into trouble. It's important to keep our good debt at a manageable level. Lenders take our income into consideration when lending us money for this reason. But it's also crucial that we look at our individual situations and not borrow more than we can comfortably pay back.
Also, bad debt is not always something to be avoided. To have a reasonable amount of what is considered bad debt is fine. We just want to keep it at a moderate level and not allow it to get out of control. Just like good debt we want to be sure we can handle the payments and only take on bad debt when necessary.
* Debt incurred to buy a home - Owning your own home has numerous benefits. But the reason that this is considered a good debt is because a home is an investment. It gains value instead of losing it, so you're putting yourself at an advantage by going into debt as long as you keep your payments current.
Borrowing money for college is also an investment ? in your education. By educating yourself you give yourself more earning power. This is an instance when taking on debt is a wise choice.
If you obtain a start up loan for a business venture this can be good debt. Again you are borrowing in order to give yourself earning potential. Of course you are always taking a chance when going into business for yourself, but often it is worth the risk and the necessary debt incurred.
More often we talk about debt that is not so good. Some examples of this are:
Financing a car ? unlike a home your car depreciates rapidly. That means you are not investing your money with the potential for a greater return in the long run. The money you spend is gone.
Almost everyone has and uses credit cards and they are convenient. However credit card debt is considered bad debt. Typically the purchases made on a credit card are things that will not earn you money over time. Credit card purchases are rarely an investment.
Another bad debt is borrowing money for personal use such as to purchase higher priced items or maybe to fund a much needed vacation. These are at times necessary but will not earn you money in the long run. Since they are not an investment this is not good debt.
Just because a debt is a so-called good debt, that doesn't mean it can't get us into trouble. It's important to keep our good debt at a manageable level. Lenders take our income into consideration when lending us money for this reason. But it's also crucial that we look at our individual situations and not borrow more than we can comfortably pay back.
Also, bad debt is not always something to be avoided. To have a reasonable amount of what is considered bad debt is fine. We just want to keep it at a moderate level and not allow it to get out of control. Just like good debt we want to be sure we can handle the payments and only take on bad debt when necessary.
About the Author:
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posted by Credit Counseling at
6:42 AM
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