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What's the Difference between Good Debt and Bad Debt?

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Published: 25Jan2008
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Not all debts are considered bad. Some debts can actually improve your credit score and your worthiness as a borrower. Let's discuss the differences between good debts and bad debts and hopefully, by the end of this article you'll be able to take an objective look at your financial state and act to manage your debts accordingly.

Good Debt - A debt that appreciates in value as time passes is a good debt. In fact, a mortgage loan is considered as a very good debt. As you know, the price of a home property usually increases over time which means the amount of loan you used to purchase your property is so much less than what it would cost after 10 years or more. This is why many people who have the resources choose to buy home properties as an investment.

A student loan can also be called a good debt. Why? Because you're using the money you loan to earn a degree. When you graduate from college, you'll obviously be earning so much more than the amount you used to obtain your student loan.

Bad Debt - Acquiring debts because you need the money for purchasing consumable things can be considered bad debt. For example, obtaining too many credit cards is not a very healthy habit. Using your credit card to spend on things that do not appreciate in value, is a big mistake especially if your credit card has a high interest rate. There have been so many people all over the world who got stuck in debt because they were unable to control their spending using their credit cards. Because credit cards are so easy to use, it is also too easy to splurge and use it in unnecessary expenses.

Another example of bad debt is a vacation loan. Some people tend to spend more than what they can afford on vacation trips because they were able to get a vacation loan. Although, it's a good idea to take a break from time to time, it would be better if you can set aside savings from your own money that you'll be spending for a vacation.

Bad Debt Management - Take a close look at your current financial status. You may have incurred both good and bad debts. If so, then you should prioritize paying off your bad debts first since they do not increase in value. However, this does not mean that you can take on as much debt as you like as long as it's a good debt. It is very important to consider things ten times before acquiring any type of debt. Even if you think it's a good investment, it is not practical to take on new debts, if you know that you don't have the means to pay for it.

Ultimately, whether it's a good debt or a bad debt, you are accountable for it. The best thing you can do as a borrower is to be constantly aware of how much you owe and what you can pay. Be responsible enough to pay back what you owe on time.

Liz Roberts is a loan consultant with NewHorizon Finance and has been providing consumers and business owners with financing since 1989. Join our mailing list for FREE tips on building and repairing your credit. We also have a list of recommended bad credit credit cards. Copyright 2008

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