The difference between good debt and bad debt

Category: Debt

woman calculate how much cost orspending have with credit cards

 

Did you know that there are two different types of debt? Although it’s ideal to pay off as much of your debt as possible, there is such a thing as good debt, in addition to bad debt. Good debt can actually help to improve your credit score, assuming you are always timely with your payments.

Good debt

Debt incurred from an investment that will grow in value or generate long-term income is considered good debt. Student loan debt can usually be classified as good debt, but only if it’s a student loan from the government, and not a private student loan. Home loan debt is another example of good debt, in addition to home equity loan debt.. Additionally, small business loans are also generally classified as good debt.

Bad debt

Debt incurred to purchase things that quickly lose their value and do not generate long-term income is usually considered bad debt. Debt that carries a high interest rate, like credit card debt and payday loans is also usually classified as bad debt. Credit card debt is one of the most common types of bad debt there is, especially if the borrower has credit cards with high balances and on several different cards. If you can, try to avoid credit card debt as much as possible, and pay it off quickly if you do rack up a lot of charges. At the very least, you’ll want to avoid credit cards with very high APRs.

 

In some scenarios, credit cards can help improve a consumer’s credit score with responsible use. This usually means just one or two credit cards that don’t carry balances from one month to the next, and credit cards that have been active for many years.

 

Payday loan debt is another example of bad debt, and the FTC often warns consumers against taking out these types of loans, which often have extremely high interest rates that typically start at 300 percent.

How to avoid bad debt

People don’t normally plan on getting into a lot of credit card debt or paying a significant amount in interest fees from a payday loan, but sometimes, things happen and these are common situations that many consumers often find themselves in. A sudden life change can totally transform someone’s financial situation instantly, whether it’s losing a job, sudden illness, accident, and so on. Having an emergency fund ready for these types of situations can make it much easier to avoid taking out risky loans and overcharging on credit cards.

Paying off bad debt

Many consumers share one similar goal, and that’s to pay off their debt, especially their bad debt. Alas, this goal is not always an easy one to reach. If you feel overwhelmed with debt and bills, and feel you have nowhere else to turn, you can turn to Peachtree Financial Solutions. If you’re receiving long-term periodic payments from an annuity or structured settlement, Peachtree Financial Solutions may be able to purchase some or all of your future payments for a lump sum of cash. Depending on how much debt you’re in and how many payments you’d like to sell, you might be able to eliminate all of your bad debt once and for all. To learn more about selling future payments for a lump sum of cash, contact Peachtree Financial Solutions today.

 

Nothing above is meant to provide financial or tax advice. You should meet with appropriate professionals for such services.

Tags: bad debt, Credit Cards, good debt, mortgages, Student Loans

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