Did you know there is a difference between good and bad credit debt? Most everyone seems to think that all debt is bad. But that is not always the case. In fact, there are instances where good debt can actually help your financial position. The differences between good debt and bad credit debt affect every loan you get and can even make the difference in getting a new job. Here are a few examples of what determines good debt vs. bad debt.
Good Credit Debt
Good debt includes anything that is too expensive to pay cash for but is something you need to survive. Buying a home is an example of taking on good debt because you need a place to live.
Most mortgages have lower interest rates compared to debt like credit cards. As long as your monthly payment is within your budget, a mortgage gives you an excellent credit reference.
Financing a car is another example of good debt especially if you plan to drive it after your loan payments have stopped. Just make sure you shop for the lowest interest rate possible.
Taking out a home equity loan sometimes makes sense to pay for a car, because the interest rate is lower than an auto loan and the interest is tax deductible.
Having good debt and making payments on time gives you a good credit rating. That allows you to borrow more money at better interest rates and can actually help your financial position.
Bad Credit Debt
Bad credit debt is any form of debt with a high interest rate for things you really don’t need. An example would be to charge an expensive vacation on a credit card that you can’t really afford.
The worst form of bad credit debt is credit card debt because it carries the highest interest rates. It’s easy to over extend yourself with credit cards and it is the biggest culprit for taking on bad credit debt.
The quickest way to recover from bad credit debt is to pay credit card debt down or pay it off completely. The best way to pay credit card debt down is start with the highest interest rate card first. Then, pay on the debt with the next highest rate until you have paid off all of your credit card debt.
Bad credit debt can also happen if you are continually late on paying back borrowed money or you don’t pay it back at all. Once your credit rating is affected, it will hurt you financially.
Bad credit debt could keep you from qualifying for loans, credit cards and may even hurt your chance for new employment. Even if you could qualify for a loan, it would be at a higher interest rate than if you had good credit.
The smartest thing you can do is to pay your credit card debt off as quickly as possible to avoid paying so much interest. While good debt will help you financially, bad credit debt will have the opposite affect.
In today’s world it’s next to impossible to live debt-free so it’s important to know the difference between good and bad credit debt.