Difference Between Good Debt and Bad Debt

With the right debt, you can significantly improve your financial lifestyle. This is why you should understand the difference between good debt and bad debt and try to always inhibit unimportant circumstances that keep you in bad debt.

But, let’s take a minute to know what good debt is and what bad debt is. After all, money owed is money owed, right?

What Is Good Debt?

Well, good debt is money that you borrow so you can increase your income or build wealth over time. Good debt usually attracts low interest and helps to improve your finances.

You can classify things like business loans, and mortgages as good debt. Some people will classify student loans under good debt, but in 2022 and beyond is this factually correct?

Student loans depending on the course of study can be good debt or bad debt. For instance, medical, engineering, and similar allied courses can be regarded as good debt. You can offset your debt in a few years and there’s always going to be a need for professionals like doctors and engineers in this changing space.

The same cannot be said about certain courses which in this changing world, you might not even need a certificate to get a job. Just proficiency in the field and you can choose to work as a freelancer or similar.

What Is Bad Debt?

Bad debt on the other hand is things that will do little to nothing to your overall financial life. They usually attract high-interest rates and the thing you purchase usually decreases in value and does not improve your financial situation.

Things like payday loans and credit cards will fall under this.

Payday loans are a typical example of bad debt. Most payday lenders place strict conditions for loan repayment. And with interest rates that go as high as 700% in some states, borrowers that fall behind on their payments get stuck with high fees and interest that they can’t easily pay off.

Credit cards can help you to build a credit score. However, they can easily turn into bad debt. This happens when you carry over your bills every month. Because credit cards usually come with high-interest rates, you end up paying a lot more than what you were charged.

You Can Prevent Good Debt from Becoming Bad Debt

It is pertinent to know that even good debt can turn into bad debt if you’re not careful. This is why it is important that you manage your finances responsibly.

You may want to get a financial professional to work with you to evaluate and manage your finances. This will ensure that you don’t take on more debt than you can afford and protect your finances.