What is Good Debt & Bad Debt | Credit Report Repair

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Good debt and Bad debt - What is Good Debt?

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Good Debt vs. Bad Debt
Debt Management

There is a great deal of confusion about these two concepts. It is very important that people understand what good debt is and the differences between the two, as only then can they make intelligent, informed financial decisions. There are situations where it can make a lot of sense to borrow money, and there are others where borrowing is a bad idea. Debt management plans have two goals - to repay bad debt and acquire good debt that will help rebuild credit scores.
Borrowing money when you have a poor credit score is always a bad idea. A bad credit history means that you will pay a lot more for the privilege of borrowing money, as well as the 'privilege' of buying anything, whether it be a car, a house, or even a new outfit.

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     Do you need help to get your debt under control so that you can take on responsible debt management? Search for companies that offer free debt consolidation consultations online or over the telephone.
     The reality is that most people have debt of some sort. The vast majority of people cannot afford to pay cash for their home or for their kid's college education. Having said that, the average American carries between $7-10,000 of debt on their credit cards, often only paying monthly minimum fees. As well, personal bankruptcies are on the rise. Before considering any debt, and when understanding the debt load you already face, understand that financial experts generally agree that any person's debt load should never exceed 35% of their monthly income.
     Important to these considerations is your cash reserve. Experts advise all of us to have between 3-6 months worth of income in a cash reserve, available in case of emergency. This helps consumers to avoid assuming more debt due to job loss, sickness or other emergencies.
     When you do decide to borrow, get the best rates. Understand why you are borrowing, how much interest you will pay over the course of the loan and how much you can afford to pay down the principle every month. Any debt assumed that has high interest rates will generally fall into the category of "bad" debt.

Some examples of "good" debt.

1) Buying a home.

     Purchasing a home can often be considered assuming good debt. It only falls into the "good" debt category, however, if the debt assumed is manageable and can be paid off over a period of time. The most important point in buying a home is not to over extend your finances. Buy what you can afford. Only assume mortgage payments that you can afford to make and include some percentage of the principle. Always try to put a reasonable amount of money down.

2) College Education

     We all know how important an education is today. For this reason, assuming debt for the purposes of education is often considered "good" debt. Having said that, always research what loans and scholarships your kid's are able to obtain to help pay for college. The same goes for adults wishing to further their education. It's often a better idea for your kids to borrow than for parents to borrow, particularly against their home. As well, depleting retirement funds is almost never a good idea.

3) Financing an automobile.

Not all experts agree that this is "good" debt. Much depends on the financial situation of the borrower. Most experts generally agree that it is a bad idea to borrow against a home to finance an automobile. As well, unless you've decided to drive the car for many years - certainly long after payments have been completed - borrowing for an automobile can be a poor decision. The goal should always be to put down as much as possible on the car, and only finance a car that has reasonable monthly payments. Always research the best deals for automobile financing, whether it be for a loan or a lease.

KEY: Always consider "good" debt as debt that will eventually contribute to assets.

Some examples of "bad" debt.

1) Vacations

     If you cannot afford to pay for the vacation ahead of time, you cannot afford to take the vacation.

2) Furniture

     Again, only purchase furniture that you can afford to pay for. Avoid falling into the common trap that you will pay monthly for furniture over a period of time. These are the types of things that pull people into bad debt and credit situations.

3) Appliances

     Appliances are like furniture - only buy what you can afford. Appliances can be a trickier item, however. There are some appliances that are very necessary. For this reason, you should have your 'cash cushion' in good shape, so that if a furnace goes or a washing machine fails, you can use cash from your emergency fund.

4) Meals out and Entertainment

     Never use borrowed money for either of these in any situation. There is never a good reason to do so.

5) Any debt, regardless of why it was acquired, that sits on a credit card and costs ANY interest.

KEY: Many experts simply refer to "bad" debt as any debt incurred unnecessarily. Many experts believe that even credit card debt that is paid off monthly should be considered "bad" debt. The reason for this is that so often people spend money without thinking, on things they don't really need, instead of using that money for savings, investments and the building of other assets. The key in these situations is making your money work for you. When you invest money wisely, you're not just spending it well, you're actually making more money.

Learn more about debt management and budgeting. Practical Money Skills for Consumers provides debt management calculators and other useful tools.