Debt is something that most people throughout the country and even the world lives with each day. It has become a necessity and right of passage for individuals as they start their schooling and careers. Student loans for colleges, mortgages for homes, and credit card debt for everything else. Many people are taught that debt is four letter word and should be avoided at all cost, but this may not be entirely true, as some type of debt can help you progress and actually lead to you making more money in the long run. Using someone else’s money to buy something you cannot afford right now leads to debt and can be scary; however, not all debt is created equal there is such a thing as good debt and bad debt.
Good debt to some can sound like an oxymoron, but it is a real thing. What is meant by good debt is when you owe on something that can increase your net worth or income over time. Examples of good debt are student loans and mortgages for a home. Student loans allow and individual to go get an education which will in theory allow them to get a higher paying job, therefore increase their income and make more money than the student loan costs them in the long run. Mortgages allow individuals to purchase a home with only a percentage of the cost of the home down. This allows the person to have a place to live that they own and can sell later, and with appreciation will hopefully be worth more then they bought it for in the future when does come time to sell. Good debt is referring to a type of debt that can often be looked at as type of investment. Student loans is an investment in yourself, and often seen as good debt. You are borrowing money to go to school to either better yourself personally, increase your income by now being qualified for a new job or moving up at your current place of employment, or hopefully both. Buying a home is the most common form of form of good debt. Whether you are going to rent or own a home you are paying each month for a place to live. If you have a mortgage a large portion of your payment each month will go towards paying off your home. Unlike renting the money does not go away each month, you get it back when you sell your home. A home is seen as an asset as often it appreciates by the time it is sold again.
Bad debt refers to things that are not bringing the individual a long-term profit. Credit card debt and other consumer debt such as charge cards at stores are great examples of bad debt. Those items are considered bad debt because the items you are paying interest for are not getting you any money, they were something that was too expensive to buy out right and now are even costing you more as the interest payments begin to add up and compound. Debt that is considered bad, such as credit cards, also usually have much higher interest rates then those that follow under the good debt category. The same person who could qualify for a 3% mortgage payment would most likely have around a 20% credit card interest rate. On top of paying extra for something that is not bringing you a long-term profit, you are paying at a much larger interest rate.
Debt may be a necessity to many in today’s society; however, some debt is more beneficial then others. Long-term debt that is given at a low interest rate can give you the opportunity to increase your income, net worth, and personal education or position. This good debt can be very beneficial in the long run. Consumer debt with high interest rates can be very harmful and turn into a lot of lost income over time. Bad debt should be avoided if possible and paid off first.