When balancing your budget each and every month, there might come a time when you are completely dumbfounded by the total amount of money that you are spending on repaying a number of debts. Things like mortgages, student loans, business loans, and auto loans can add up if you let them. Those debts arenít exactly terrible debts to have, though. There are, however, things that are considered bad debts. When a creditor pulls up your credit report, they will divide debt into two categories. There is good debt and there is bad debt.
Sometimes, there are pieces of debt that can be considered as something of an investment. Though debt itself has developed a bit of a negative stigma in recent years, there is still a place for some good debt within effective debt management principles. If you had to take a loan in order to purchase something that is nearly sure to increase in value, then you can consider that debt to be a good investment. It might require a repayment, but it will improve your overall financial situation.
One prime example of good debt is a home mortgage. Nearly everyone has to include a mortgage payment into their debt management plan. It is a fact that not many people have the resources to simply pay for a home in cash. Banks are willing and able to help you with that home purchase. Homes, though, are considered good debt because of the fact that they often increase in value over time.
Student loans are also looked upon as good debt. A college degree will enable a person to make much more money over a lifetime than simply a high school diploma, so this investment helps over the long term. It is much easier to practice good debt management when you are only looking at these good debts. Bad debts, however, require much more attention to detail.
Bad debt generally occurs when you use credit to purchase things that are going to be consumed. This could be anything, including clothes, food, or a vacation. You can fall into a terrible cycle of debt management when you use credit cards to finance these things. Credit card debt is commonplace in the United States and it renders some people financially helpless. In order to avoid this situation, effective debt management should take place and these purchases should be limited.
Effective debt management of bad debt is essential if you want to keep your head above water. All bad debt should be paid off in full every month. Carrying a balance with high interest rates is a quick way to drain your finances and land you in trouble with credit card debt.
The primary difference between good debt and bad debt has to do with planning. Good debt is planned out and it always have a purpose in the end. By comparison, bad debt is something that is usually accumulated because of irresponsible debt management. By taking the time to plan out your financial future, you can maximize your use of good debt and limit the bad debt.