Is there such a thing as Good Debt or Bad Debt? I would definitely say yes!
First of all, let’s look at what can make a debt “good”. There are several ways that a debt can actually be good for you. Good debt are debts that as you pay them down, your net worth increases. For instance, mortgages are normally good debts. As you pay off your mortgage, your equity in your house increases, thereby increasing your net worth.
Secondly, a debt is also a good debt if paying it regularly and timely increases your credit score. Nearly all mortgage companies will report your payment history to the credit bureaus. Mortgage payments are the best indicator to other creditors of your credit-worthiness and are a big factor in your credit score.
Finally, the fact that a debt is actually for a necessity would help to make it a good debt. Back to our mortgage example, paying for a place to live is a necessity for most people, further serving to make a mortgage a good debt.
Now, let’s look at what can make a debt “bad”. First, outrageous interest rates or financing costs would definitely make a debt bad. A prime example of this is pay-day loans also known as check cashing companies. Few people ever seem to get those actually paid off, instead they keep returning week after week to renew the loan, never even coming close to touching the principal of the loan.
Secondly, a debt is bad if even if you are paying timely, the company doesn’t report to the credit bureaus. Your faithful payments do nothing to increase your credit score to help you obtain better credit with lower interest rates in the future.
Finally, what are you actually paying for? While it is certainly nice to take a great vacation or buy designer clothes, are they really worth going into debt for and paying interest? When you charge that $200 purse that seems like a bargain at the time on a credit card with 27% interest, you could easily end up paying $40.00 in interest on that purse alone if you make only a minimum monthly payment on the card.
Sometimes debts that start out good can turn bad through no fault of your own. An example could be a car loan. Even if you do your homework and get a great price on the vehicle, the financing might be so unfavorable that you become upside down on the car immediately after purchase. This means that you owe more on the car than it is worth. While all cars depreciate after purchase, some depreciate faster than others, leaving you “under water” on the loan when you drive off the lot with your car.
The lesson to learn from all this is that if you have too many bad debts or good debts gone bad, you may need to look at filing bankruptcy as a resolution to your financial problems. If you suspect this is your situation, contact a qualified bankruptcy attorney who can analyze your situation and recommend the best path for you to take.