This article discusses good and bad debt. a lot of people have debts that they are trying so hard to deal with. When you apply for a credit card, financial institutions evaluate your credit report. They as well check your debt to know if you will really be able to payback.
Also, as an individual working hard to get out of debt, it is important to know the weight of your debt. This will enable you to employ the best mechanism to fight it.
Good debt is when the money you borrowed is for improving your financial situation. It is an investment because you know for sure that you will reap more than the borrowed money, pay it back and make some profits. An example of good debt is taking a student loan to finance one’s college education. Another one is borrowing money to farm, when you harvest your crops you pay back.
Borrowing to buy luxurious and expensive items which are also consumable items. A lot of times, the cardholder is sure he cannot afford the item. Using your debt to pay for a vacation you cannot afford is bad too. When you use debt to finance things that can be consumed, you’re taking on bad debt. The available credit in your card is what you must pay back. It is not advisable to use it for items like clothes or food. If you use a credit card for these types of purchases, it should be to earn rewards.
What Can You Do?
Always remember that good debt should involve making positive plans for the future. If you have no positive plan about taking it, simply leave it. You can work harder, take extra shifts or get a second work. This will enable you have more to spend instead of borrowing.
Moreover, if you have any, consider them to be good or bad. Start with paying off the bad debts. The bad debts include your auto loans and credit card debts. When you finish, you can now payoff your mortgages and student loans.
Additionally, do not use your good debt to pay off bad one. An individual getting a mortgage for $100,000 instead of $90,000 may decide to use the extra to pay off credit card balances. This is bad because it will take you longer to pay. Also, higher mortgage increases your monthly payments, and the time it takes to build equity in your home. Use cash to repay debts. That is the best option.
In conclusion, do not borrow too much even if you think that your investment will pay off completely. Unforeseen may occur. Be on the safe side. Too much of it can spoil your credit score.