Understanding Good Debt vs. Bad Debt
We all have some sort of debt that ranges from credit cards and auto financing to home mortgages and student loans. While some debt is inevitable, it is important to know that all debt is not created equal, and it is important to know the difference between good debt vs. bad debt.
What Is Good Debt?
Good debt is debt that supports your long-term financial goals and helps you build your future net worth. Good debt typically includes loans with low interest rates that help build your credit history and enable you to grow your wealth. Examples of good debt include:
- Home Mortgage = Helps you build equity and property value
- Business Loans = Starting a business can increase your income
- Student Loans = More education results in better paying jobs for a better financial future
What Is Bad Debt?
Bad debt is debt is money spent on things that don’t increase your net worth and can potentially be harmful to your financial goals. This is often due to high interest rates with expensive payments that can make it difficult to repay these obligations. Examples of bad debt include:
- Credit Cards = Monthly balances on high interest cards can add up quickly with unaffordable payments
- Luxury Items = Financing expensive items that lose value quickly can quickly add expensive interest that will take months to pay off
- Payday Loans = Cash advances from payday loan companies have high fees and interest rates and should be avoided
Is Debt Really That Black and White?
It is also important to know that good debt vs. bad debt isn’t always black and white. Just about any debt incurred can be considered good or bad, depending on how you face it. Often, the debt incurred is really more about your spending and repayment habits, which can make all the difference.
Are Credit Cards Good or Bad Debt?
There is certainly a time and place to use credit cards, and it is definitely a type of debt that can fall into either category. Careful spending, interest rates, balances, and repayment habits are all factors to consider with credit card debt and can determine whether it is considered good debt vs. bad debt. Low interest credit cards Members Plus are a great option when choosing credit card options. Be sure to check out your options for low interest credit cards from MPCU when considering a new card for personal use.
Where Does Buy Now, Pay Later Fit?
Buy now, pay later options can be useful in certain situations, but you must be very careful of the terms. Users may get instant gratification now from the purchase, but with delayed payments, buy now, pay later loans can easily cross the line with problematic debt with accrued interest and future payments you may not be able to afford.
Finding the Middle Ground
It is important to be an informed consumer and understand the differences between good debt vs. bad debt and how it can dramatically affect your finances. Be sure to pay attention to the interest rates and loan terms to determine the cost of borrowing. Also, consider the repayment strategy, which can matter just as much as the type of debt you incur. Payment affordability is crucial to repay debt in a timely manner.
How to Avoid and Reduce Bad Debt
The real key to financial success now and in the future is to avoid and reduce bad debt as much as possible. Here are some smart money tips from the financial experts at MPCU to help you choose good debt vs. bad debt for your loans.
- Avoid Taking on Unnecessary Debt
- Budgeting is crucial to ensure you can afford any new debt – good or bad. Living within your means is important for financial success. Be sure to evaluate any major purchases and compare your borrowing options to ensure it makes good money sense.
- Create a Debt Repayment Strategy
- While having some sort of debt is inevitable, it is important to create a debt repayment strategy that works with your budget. Prioritize balances and make an effort to consistently reduce debt to keep your finances in check.
Consider Ways to Consolidate or Lower Debt Costs
Members Plus Credit Union offers a variety of lending solutions to help qualified members reduce debt for a bright financial future. Personal loans, balance transfer credit cards, refinancing, Home Equity Loans, and HELOCs are all great ways to consolidate or lower debt costs. We invite you to contact us to learn more about how these products can help you with your unique debt situation.
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