Good Debt, Bad Debt

Good debt is debt that is used to finance something of value that has the ability to appreciate (such as a home). Bad debt is often used to finance items that can appreciate, such as gold jewelry or a car. In general, people use good debt to make solid investments while carrying sufficient cash to handle general monthly expenses. Bad debt is commonly used for consumer purchases such as restaurant meals, electronic gadgets, or other consumer products.

Consumer debt is expensive. The interest rates are typically much higher than the borrowing rate, and the penalties for paying late are often greater than the interest on the debt, especially credit cards. To use good debt, the borrower would usually have to have significant net worth, a good credit score, and a stable and permanent source of income. To use bad debt, the borrower needs a solid credit score, a good relationship with a lender, and a temporary source of money.

It's often hard to establish what is good debt and what is bad debt. It really depends on your circumstances, your objectives, and your needs. The unsecured nature of credit cards, for example, makes it easier to establish what is good debt. Credit card debt is unsecured, which means that it is not linked to any asset that the borrower could risk losing, such as his or her house or car. Therefore, credit card debt is good debt if the borrower always pays on time and has sufficient available cash to cover future monthly expenses.

On the other hand, car loans are secured; they are linked to a borrower's car, so if the borrower loses or decides to give up the car because of any reason, the lender still has recourse to repossess and sell the car to cover the cost of the loan. This makes it bad and credit wise, which often translates to higher interest rates and more difficult to amortize. Home mortgages are also secured loans, but unlike car loans, home mortgages can be paid off early without penalty. This can save a great deal of money in the long run because interest rates on home mortgages are lower than on credit card interest rates.

Credit card debt is, in my opinion, the worst kind of debt there is. Not only are the interest rates very high, many credit card policies are vicious with their annual fees and mysterious charges. Credit cards should only be used in the worst case scenario, where a borrower has no other option but to use the credit card as a last resort. Car loans are good in that they offer a useful product at a reasonable price. Credit card debt should be avoided at all costs.

Before all bad debt is accrued, borrowers need to have a budget plan so that they know how much money they will spend each month to pay off their debts. For many borrowers, this might seem obvious by the fact that they know how much they pay in taxes and car insurance, but they often overlook the small purchases they make when they have a credit card. These items, paid for with credit card cash, may seem innocent in today's world, but they generally have a much higher dollar value when summed up over the year. The consequences of spending too much can be great, and that is why every borrower should have a budget plan.

For some borrowers, the problem lies not so much with credit cards but with their entire budget system. When all your spending is on cards, there is no available cash to spend on the necessities such as food, clothing, and gas. Because of this, many borrowers get into financial trouble and begin incurring debts. For many borrowers, this problem originates from the use of too many credit cards. It's understandable that borrowers want the all the perks of credit cards, but borrowers who have multiple cards should not rule out the possibility that they could overspend.

Home loans are a similar thing. While many assume that homeownership makes it's borrower able to spend money without consequences, that isn't always so. The consequences are, of course, the bills that must be paid each month. Borrowers who can only afford to make their mortgage payment each month probably wouldn't spend money on luxuries such as vacations and new cars, but if they're struggling, they may wonder how much they're paying for all the extras on their cards. The only solution is to budget.

Budgeting works for multinational companies, families, and individuals. As per Rawad Roy Alame all three of these groups are able to get their debts under control simply by controlling variables such as income, income, and budget. The same principle applies when deciding on what kind of debt to carry on a credit card or in a home loan. Perhaps one of the simplest ways to accomplish this is by dividing up the debt with an up-front budget and use those funds only to pay off the minimum payment on loans. If the borrower has extra moneyafterthe payments are made, access those funds to pay off debts.