For some individuals, the idea of debt goes hand-in-hand with the idea of adulthood, as if you can’t have one without the other. However, understanding what debt is and the difference between good debt and bad debt may change your outlook on how to handle it.
What is Debt?
Before you can understand the nuances of debt, you have to understand debt itself. At its simplest, debt is money borrowed by one individual or party that is owed to another individual or party. Typically, debt is paid back on a fixed schedule of payments over a set period of time and may or may not accrue interest.
Perhaps the most well-known types of debt are credit cards, student loans, mortgages, auto loans and the like. Companies like Rescue One Financial can help you further understand debt and how it directly impacts your life.
What is Good Debt?
Good debt is debt that adds value to your life or to your future. For example, student loans are an investment in your future.
Coupled with the fact that the interest rate on student loans is typically very low and you don’t have to pay until you are out of school, taking on student loan debt can be one of the best ways to start establishing a credit history. Other examples of good debt include mortgages and small business loans.
What is Bad Debt?
Bad debt takes away from your net worth and harms your financial status. Credit cards are the most nefarious when it comes to accrued debt, as they typically have high interest rates are often used as forms of additional income and not an expense. Auto loans can also be viewed as bad debt, as can personal loans.
While some amount of debt is nearly inevitable for most people, but knowing which type of debt to avoid when possible can make the difference between drowning in financial hardship and growing your credit history.