Taking on some debt, like a student loan, can be good. If you have too much bad debt, such as credit cards, you may end up in a difficult situation. Learning the difference between good and bad debt can help improve your overall financial well-being in the long run.
What’s good debt?
Generally speaking, debt for something that has the potential to increase in value over time is considered good – like purchasing a home, or taking on a student loan for training or education that can increase your ability to get a good job.
Of course, both situations assume you can afford to repay the debt. If you can’t, stay away from it, even if it sounds good.
If you borrow money for something that will likely drop in value, that’s bad debt. Buying a TV or computer on a credit card is a classic example of bad debt, unless you pay off your balance in full each month. This type of debt typically comes with high interest rates and should be avoided whenever possible.
If you find your debt piling up, take steps to get it under control as soon as possible. Decide which of your debts to get rid of first and pay as much over the minimum as you can. Place priority on bad debts. Consider going after credit cards or loans with the highest interest rates first. Some people are motivated to make more progress by paying off the smallest balances first. Whichever approach you decide on is fine, as long as you stick to your plan and do what’s in your best interest.
3 keys to managing debt:
- Do your best to completely pay off any credit card balances every month.
- Pay at least the minimum amount due on all debts each month to avoid unnecessary penalties and interest.
- Get rid of bad debts first, and then chip away at good debts.