You’ve probably seen TV commercials about getting out of debt fast or articles about people who spent years getting out of debt. But having debt isn’t always bad.
If you’re like most people, you can’t afford to pay cash for a major purchase like a house, college tuition or car. So some debt is nearly unavoidable, but which kinds of debt can be OK?
Debt that is considered “good” is debt that is used for financing something that will increase in value over time or even generate long-term income. Another advantage, loans for good debt typically have lower interest rates.
One example of good debt is student loans. Post-secondary education has continually been shown to increase potential income, not to mention the added advantage of finding lucrative employment.
A mortgage is also viewed as good debt, as housing values often increase 2-3x over the course of a 30-year loan. Plus, the interest on a home loan is also tax-deductible. The obvious exception to this rule is if you are in an area where the real estate values are plummeting, or you owe more on your home than it’s actually worth.
Business loans are also seen positively, in terms of debt. Investing in your company allows you to grow your business and increase potential future earnings.
But too much good debt can end up being not-so-good. The overuse of good debt can have a negative impact. It’s always important to carefully review your finances and consider your future plans before taking on any large debts – good or bad. And speaking of bad debt…
Debt characterized as “bad” would be an item that depreciates rather than increases in value. And you guessed it — these loans often have a higher interest rate.
Credit cards can become one of the worst forms of bad debt, if they’re used incorrectly. Carrying a monthly balance results in high interest rates and late payment fees if they’re not paid on time. Besides paying off your balances in full every month, consider opening a credit card that offers advantages or pays you cash back, like the First Internet Bank Visa Cashback Card.
Although the loan interest rate isn’t quite as high, a brand new car is considered bad debt because it depreciates the moment you drive your new ride out of the car lot. You will also pay a lot more for the car than it is worth when the loan is paid off.
Debt is not the end of the world as long as you’re smart about it, stick to your payment schedule and avoid taking on more than you can comfortably handle. You can always reduce your debt by making extra payments with a tax refund, work bonus or when your budget allows. Debt is a necessary evil for most, but with smart decisions and responsible money management, it’ll be more good than bad.