Bad Debt vs. Good Debt

In order to deal with your debt, you should determine in which category your debt is in. Now, there is a new trend in debt classification which includes two branches: good debt and bad debt.

In US, they classified debt into two branches: good debt and bad debt. Of course there is a considerable difference between them. Time to know that discrepancy and how to get rid of each one!

* The Definitions:

- A good debt is a loan for something that you could sell at any time to repay the debt. The examples of good debt are a home purchase, paying for collage, a student loan, and financing a car. The best advice here is to take for which you can afford its monthly payment.

- A bad debt is an expense on the person’s income statement, thus reducing net income. It refers also to the loans taken to buy things you neither need nor afford. Those loans create an unhealthy financial situation. The worst form of bad debt is credit card debt that has the highest interest rates.

* How to manage both of them:

Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36% of your gross monthly income. (according to CNNMoney.com)

It’s wise to manage your money and what you do borrow!

* What should you do?

- Compare what you will spend and how much money you earn.

- Seek for loans that have low interest rates.

- Make wise decisions about your future in order to obtain good debt.

- After analyzing your financial picture, try to pay off your debt.

- Focus on paying off your bad debt first, then the good ones.

- Use cash to repay your debt. Be aware, it’s not a good idea to use good debt to pay off bad debt. Think it over!

All in all, you should know that whether your debts are good or bad, they will hurt your financial health. As a result, your life will be affected too.

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