Get Out of Debt Today by Differentiating Good and Bad Debt

Do you manage your debt or does your debt manage you? If you have high “bad debt” chances are your debt is in the driver’s seat (especially if you have a big car loan).

Good Debt

Good debt helps you gain assets that produce income. For example, if a loan will eventually put you in a better financial position, more than likely it’s good debt. Some people believe that never having any debt at all is the best answer, however, this makes it difficult to accumulate wealth.

Mortgages: Debt You Can Live In

Not only does owning your own home give you a roof over your head, it also gives you the opportunity to build equity. Most mortgage lenders will allow you to put 29 to 41% of your income towards housing. But many consumers, including those with poor credit, have trouble finding a lender willing to give them a loan. Learn more about what to look for in a mortgage from InCharge Housing Counseling.

Student loans: Debt You Can Earn Back

Because college graduates earn more than high school graduates over the course of their careers, a higher education often pays for itself. In fact, advanced degree holders often earn two to three times as much as those who only finished high school. College isn’t cheap. The average cost for a four-year degree, including tuition, room, and board at a public university, is more than $50,000. Student loan interest rates are lower than interest rates for other kinds of debts, especially credit card debt.

Bad Debt

Bad debt is easy to identify. Bad debt monopolizes your cash flow, but doesn’t pay you back, because the money has gone into things that lose value. It’s also easy to spot because it’s everywhere. In fact, many consumers have so much bad debt that it keeps them from being able to get good debt.

Credit card debt: Debt that Lives off of You

Buying with credit cards means you are paying a higher price tag for everything you charge. Items purchased on credit almost always decrease in value. Say you had an $8,000 balance on a credit card at 13% interest, and you only made the minimum payment of 2% of your balance each month. Even if you charged nothing else on that card, it would take you more than 27 years to pay it off, and you would have paid almost $9,000 in interest! Need help to get out of credit card debt? Car loans: Debt That Drives You Upside Down

When consumers buy more car than their budget can afford, the loan becomes bad debt. Most cars depreciate 20% in the first year, then in smaller increments after that. Because of this, many car buyers find themselves making loan payments that are actually higher than their cars are worth, which is known as being “upside-down” on a car loan. This is why it is often a better choice to buy a used car than a new one.

Battling Bad Debt

So how can you improve your ratio of good to bad debt? Make a plan to pay off your bad debt first: start with credit cards and other high interest loans. By sticking with your plan and making consistent, on-time monthly payments, you’ll be paying off your bad debt while showing your creditors how serious you are about improving your credit situation, which in turn can help you qualify for better interest rates on mortgage, auto and credit loans in the future. You’ll be setting the stage for financial success—just keep up the good work!