One question that’s been posed by some of our customers deep in credit card debt and in need of credit score repair concerns the different types of debt and whether there’s such a thing as a good debt (that is, something worth being in the financial hole for) versus the obvious bad debts that seem to pop up on some many of their credit reports.
Today, I thought I’d briefly touch on what might be considered a “good” debt over all the bad ones – kind of the same as good vs. bad cholesterol – and how to avoid the bad ones so you don’t fall too far into a money pit and wind up in need of serious debt relief.
Bad debt
Let’s start with the obvious: debts that you don’t want to find yourself in. Most people will probably tell you that any type of credit card debt is automatically bad, and they’re not necessarily wrong, but that doesn’t mean they’re right on the money either.
Think about what you use your credit card(s) for. If you’re like a lot of people these days and tend to break out the plastic for every purchase you make, from gas to clothes to a night at the movies and don’t pay off the balance in full each month, you’re already making a lot of headway on the highway to bad credit. Before you know it, you’ll end up with a bill upwards of $600 for a bunch of items you could have SWORN didn’t add up to that; it’s gotta be a problem with their math, that’s all.
Bad debt doesn’t just stop at the checkout counter though; many people get into bad debt when they decide to use their credit cards to fund even something that might be good for them, like a vacation. Now, I’m not about to say you shouldn’t take a vacation – God knows I could use one. What I am saying is that you shouldn’t rely solely on your credit cards to carry you through that Caribbean cruise or Eurotrip without first planning for the trip and what you’ll be spending on it.
Simply put, if you can’t afford a big vacation like the ones I listed (hell, even something like going to Disneyland for a SoCal resident can drain your available funds faster than you can say “I think we’re parked in the Goofy lot”) with your available budget, consider dreaming a little smaller, or at least putting it off until you have the funds for it.
Good debt
These are all obvious examples of debt that’s gone wrong, but what about a good debt? Is there even such a thing as owing money for a good cause? A good debt can also been seen as something of an investment; one that you can actually expect a return on. The most immediate example of a good debt is a student loan. Higher education is always important and can usually lead to higher paying jobs, meaning you’ll be able to take care of your student loans over time.
You could also consider buying your home a good debt or investment. And with the market in the slump it’s in now, it can be easier to get in at the ground floor and wait for the property to appreciate.
How do you tell the difference?
If you noticed the Bad section outweighs the Good portion of debt, that’s because it can be incredibly easy for a debt taken out with the best intentions to go sour real quick if you don’t keep an eye on it. If you just skimmed the rest of the article, I’ll lay it all out for you here:
A good debt is something of long-term value, like a house or an education. A bad debt is anything you buy that you basically can’t afford to pay for then and there, and won’t see an appreciation in value. If you find the majority of your debts are falling into the “bad” crowd and you’re in need of credit repair services, give one of our specialists a call to set the record straight.
