There is definitely an argument to make that no debt is good debt, but the only way many people can afford to purchase big ticket things like homes and vehicles is to borrow money and take on it.
Although differentiating between these two extremes is simple, deciding whether it is good or bad more frequently requires more in-depth analyzes of particular circumstances.
1. Good Debt
Good debt is a loan with the potential to boost your net worth. The old adage “it takes time to make time” exemplifies good debt. When you take on helps you produce revenue and raise your net worth, it can be considered beneficial. There are a number of important things worth debting for. For instance, technical or college education, small business ownership, real estate including homeownership.
2. Bad Debt
Although good debt has the ability to raise a person’s net worth, if you borrow money to buy depreciating properties, it’s usually considered bad debt. In other words, if it is not going to increase in value or produce revenue, then you should not go to buy it.
Some particularly noteworthy items concerning include cars, clothes, consumables, and other good services, and also credit cards. As a suggestion, keeping a credit card balance is never a smart idea; interest paid on credit card reduces the value of future rewards.
3. Special Considerations
Not all debt can be so easily categorized as good or bad. It also depends on your own financial condition or other considerations. Some kinds of it can be good for some but bad for others. For instance, consolidation loans, borrowing to invest, and credit card reward program.
First, consolidation loans may be beneficial. It takes out a loan at a lower rate of interest. The aim is to use the cash extracted from lower payments to continue paying down it.
Second is borrowing at a low-interest and invest at a higher rate of return. Investors can tend to be a strong way of achieving better than expected results.
Unfortunately, it comes with several consequences to the novice, as well as the possible danger of losing a large sum of money and being forced to pay the broker for the borrowed funds. Therefore, it is an choice that only experienced investors who can afford to bear losses should an investment go south will follow.
Last but not least is about credit card reward programs. The money earned using credit cards will help customers get free plane tickets, free cruises, cashback and a variety of other advantages.
That is worthwhile if you have the discipline to pay off your balance every month. Otherwise, interest paid from the credit card reduces the bonus value.
