Good Debt Vs Bad Debt

Many of us like to avoid that vulgar 4 letter word – DEBT. Debt can haunt you for years and consume every aspect of your financial life if you let it get out of hand. Now a days it is almost impossible to live without some kind of debt unless you decide to pay for your house with cash. Not very realistic, right? Well did u know that debt can also help you if you use it wisely?

Let’s compare….

Bad Debt
First off, bad debt is spent on things like impulse purchases that quickly lose their value (such as that trip to Puerto Rico or that new flat screen TV). The worst form of debt is credit-card debt, since it usually carries the highest interest rates. Just remember, the general rule to avoid bad debt is: If you can’t afford it and you don’t need it, don’t buy it.

Good Debt
Good debt includes anything you need but can’t afford to pay for up front without wiping out your emergency funds or liquidating all your investments. In cases where debt makes sense, ONLY take loans for which you can afford the monthly payments. The key word is afford. It’s vital that you budget your personal finances in order to keep your debt under control. Remember… making your payments on time and carrying the debt for a long period of time in good standing are two critical components toward increasing your credit score.

It’s far too easy to spend more than you can afford, especially when you pay using a credit card. The average U.S. household with at least one credit card carries nearly a $15,950 in credit-card debt (in 2012), according to Crazy right!? My rule to staying on top of credit card debt is to use it, but don’t abuse it!

Of course, avoiding debt all together isn’t good either. You need to build credit so lenders such as credit card companies, insurance companies, financial institutions and even some employers know whether or not your are reliable and able to pay back your dues.

Key Notes: Don’t take on financial burdens if you can’t afford to pay back your debt. Have a good payment plan and strategy mapped out. Without a plan, debt can be the one thing that will destroy your financial health, no matter how good you are at every other aspect of managing your wallet.

Until Next Time,

Jessica M.

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