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Cents and Sensibility

Good Debt vs. Bad Debt

Not all debt is bad. What is good debt vs. bad debt?

Here are a couple of pointers to help you figure out the difference:

Good debt: Good debt includes something that you need to purchase, but can’t afford to pay the total amount up front.

1. Student Loan: Paying back a loan to a college or university that will help you become a graduate is a good debt. Look at it as an investment. You take out a loan to pay a university and in turn make more money than a non-graduate. Additionally, interest rates on student loans are typically lower than interest rates on credit cards and automobiles.

2. Mortgage: A mortgage is considered a good debt because it will allow you to purchase a property to live in. Once that property is paid in full, that home will be a huge financial asses, which is more likely to grow in value over time. Additionally, nowadays, a some mortgages are cheaper than paying rent, so why not invest long-term with the potential of a great outcome.

3. Your Own Business: A loan to help you create and develop your own business is also considered a good debt. This is, however, if you will implement a creative, but realistic business plan. If your business does well, you will reap the benefit of not only paying the loan back, but also start to bring in your net worth.

Bad debt: Bad debt includes something you don’t need and can’t afford.

1. Credit Cards: This is considered bad debt since it usually carries the highest interest rates. Use cash instead. Three benefits for using cash instead of credit are: 1) You can keep up with how much you are spending; 2) You can eliminate fees and interest rates associated with credit cards; and 3) Cash is king, which allows you the ability to negotiate.

2. Payday loans: Payday loans are also considered bad debt. The payday loan stores charges outrageous interest fees. Plus, some payday loan corporations ask to hold your merchandise until the debt is paid.  It may be cheaper to hold off and pay something late rather than to rack up on interest rates and face the potential loss of merchandise (car, home, etc.).

3. An extravagant vacation: A grand vacation may be a trip of a lifetime, but also a lifetime of debt. Instead of continuing the debt cycle, try to save your money first, if possible, rework your budget and vacation plans so you can still have a vacation, but one that you can afford.

About Dr. Karen Ratliff

Karen Ratliff

Credit: Dr. Karen Ratliff

Dr. Ratliff is a certified life coach and professional educator, assisting many people in accomplishing financial, career, and educational goals.  She is also the author of “Tightening Your Bootstraps: 104 Tips to Kick Your Debt to the Curb Now.” Keep up with her budgetary advice via Twitter @drkarenratliff  her website at www.drkarenratliff.com, and her facebook fanpage “Financially Focused with Dr. Karen Ratliff.”