Debt has a lot of stigma attached to it, and so suggesting that it can be in any way good might be a little surprising. Admittedly, some forms of debt are still very bad- living above your means and spending money you don’t have on things you don’t need is always going to end in tears. However, in some cases, it can be life changing in a good way. Here are some examples of good and bad debt and how you can tell the difference; that way you can make an informed choice when borrowing money, and do it correctly.
What is ‘Bad Debt’?
Before understanding what good debt is, it’s important to understand what kind is bad, and why. Bad debt comes about when you use things like credit cards, loans, store cards and other forms of credit to buy items that you don’t really need. This usually starts off innocently, but before you know it you’re using your credit as if it’s money that you have, and spending it on what you want. Unfortunately, high-interest rates can mean its a slippery slope. It hard to get out of debt, and you end up paying back far more than what you originally borrowed.
What is ‘Good Debt’?
Good debt on the other hand, is when you lend money for an investment that will earn you money back in the long run. For example, a mortgage on a house is good debt, as property accumulates in value each year. Lending money to go back to school can get you a better job and mean more money with your wages- there are all kinds of credible student loans that you can look into online. It could also mean investing in your own business, this would allow you to quit your day job and follow your passion, and generate profits year after year. In some cases, buying a car on finance can be good debt, as it may allow you to widen your job search and lead to a role with better pay.
The thing with good and bad debt is that it’s not always black and white. For example what would ordinarily be considered bad debt could be good in some cases. Going on a frivolous vacation on credit for example would usually be considered as living above your means and would be better to be saved for. But perhaps this is your last family trip while your children as still young, or maybe someone in the family is ill and you have limited time with them. This of course changes things. Take the new car example; if it allowed you to get a better job or perhaps took a lot of strain off the family member currently taxi-ing you around, then it could be worth it. However, if public transport is an option or you don’t need it to improve your life, then it’s just a luxury and would be bad debt. Use your common sense.