Good Debt vs. Bad Credit — Understanding Credit Card Debt


Manage Your CreditDebt is such a bad word. Or is it?

Today, many find themselves drowning in financial debt from credit cards and other financial obligations. If you're one of those looking for a life jacket, it is important to know that there's both good and bad debt.

Knowing the difference between each and how to manage them will not only give you opportunities for stashing away money for a rainy day or buying a new TV without credit cards, but it also could help you control what hits your credit report.

Good Debt

Mention "good debt" and most people turn an eyebrow and give you a "are you crazy?" look. This is because the word "debt" typically causes people to think of something bad — not something good. Debt usually means high credit card bills, high-rate loans, and other less-than-ideal financing situations.

Although it's not as common, there is some good debt. For instance, the Motley Fool considers OK debt as anything with an interest rate well under 10% - preferably with some tax advantages. Examples of these include: home mortgages and student loans. However, vehicle loans are on the borderline since they can satisfy the low-rate requirement, but almost never appreciate.

Bad Debt

Although there's good debt, bad debt is the most prevalent type of debt in our country now. With an average credit card debt of $8,000 for each household in America, we understand why most debt has a negative tone to it.

When you're looking at your credit card debt and wondering if you're accruing more bad debt than good debt, consider these:

  • Charging more than you pay: It's simple — if you have a larger hole than the dirt you shovel into it, it will never become full. This is considered bad debt.
  • Maxed out cards: Not only do maxed out credit cards show your dependency on them, they also impact your credit score utilization rate, which could make a negative impact on your credit score.

Knowing the difference between good and bad debt is essential to staying ahead financially.

Remember, good debt is an investment that creates value, including: home mortgages or business loans. Bad debts are when you purchase disposable or durable goods using high-interest credit cards, but don't pay the balance in full.

Use this knowledge to keep track of good and bad credit and try to take advantage of good credit whenever possible.

If you're looking for more information on good and bad debt and how it impacts your credit score, look at other resources in our credit library.

 

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