Good Debt? Bad Debt?
In this day and age, it’s difficult to make some life choices without borrowing some money. Debt can come in different forms, but with careful consideration and a realistic mindset borrowing money can have a positive impact on your financial future.
Before getting into debt through a loan, credit card or overdraft, it is essential to understand what makes a good debt and a bad debt. Here’s how you can decipher between the two:
What is ‘bad debt’?
To simplify the term, if you cannot afford to borrow money it is known as a ‘bad’ debt. Borrowing too much or if you are unable to repay the money you owe (e.g. monthly repayments) it will have a significant impact on your finances.
Examples of bad debt can include:
Everyday bills: Borrowing money to pay off everyday bills can become a downward spiral. Many individuals will take out personal or payday loans to pay off existing credit or bills and will land themselves in even more debt.
Credit Cards: Credit cards are known as the worlds’ biggest driver of debt and that is all down to interest rates. Credit cards should only be considered as a short-term transactional debt. If you do not pay off your monthly credit card balance you will be paying more for the item you purchased in the first place, which will land you in further debt.
Holidays: We all love to go on holiday, but if you can’t afford it – stay at home, it’s as simple as that. Instead of plummeting into debt by taking out a loan to go abroad, save first or revise your plans to arrange a holiday that is within your budget.
Gambling: The obvious. Gambling for a hobby is acceptable, however no one should take out a loan to feed their gambling antics.
What makes a ‘good debt’?
Good debt should be considered a sensible investment that will benefit you and your financial future in the long-term.
Types of ‘good debt’ can be identified as follows –
University: Attending University is considered a good investment and it is acknowledged that graduates who have pursued further education are expected to receive higher potential earnings than individuals who have not.
Mortgage: If you are going to be in debt, there is no better debt than a mortgage. For starters you need somewhere to call home. In future, your house will then become a major financial asset once you have paid off your mortgage.
Purchasing a car: Getting from A to B is a requirement for some lifestyles. When it comes to purchasing a car, be realistic, you must be able to afford the loan and the running costs of the car.
Good debt is not to be taken advantage of and must be a well thought through process.
If you are struggling with ‘bad’ debt and want to discuss your options, contact us today. Clive, can help you regain control of your finances and help find a solution to your problem. Contact us by phone on 01656 661426 or click here.