Comparing Good Debt And Bad Debt

One often finds several high profile financial professional experts who consider all debts as bad debts. However, there are also other experts who would clearly differentiate between good and bad debts. This proposition is primarily based upon the manner in which debt is used, whether in a good way or bad way. Here are some of the differentiating aspects between a good and a bad debt:
Credit Cards: Even though credit cards are generally viewed as bad debts, they can also be utilized in a good manner. Using a credit card can amount to a good debt when you use it in purchasing some item which you actually require and it is purchased at a reasonable interest rate spread over a considerably short span of time. However, it can amount to bad debt when you are unable to pay off the entire amount of your monthly dues which have been purchased at a high interest rate and all you are doing is paying the minimum monthly amount in order to avoid defaulting. This way, you end up paying your additional debts for a considerably longer period of time.

Home Mortgages: A home mortgage was traditionally seen as a good debt. However, since the recent slack in the real estate market, not all home loans can be termed as good in the long run. A home mortgage or a bad credit home loan can amount to a good debt if the total monthly amount spent in reimbursing your home loan (including any tax deduction or upkeep cost) is the same as what you would have spent had you rented it. On the other hand, if the scenario accounts for you paying most of your monthly earnings towards your home loan or you know that you are indebted for an amount more than what could be realized after selling the home property, then it is a sure case of bad debt home loan.

Student or Educational Loans: Education is always seen as an investment by most people. However, a student loan can be hard to discharge in case of a defaulting student. In order to avoid a student loan going bad, you need to be do some level of future calculation and comprehend the loan amount on the basis of your potential future earnings. An educational loan can be termed as a bad debt when the student ends up leaving the course mid-way or the debt amount is much higher than the salary you get.

Auto or Car Loans: Purchasing a new automobile is not a luxury that everyone can afford. This is the reason people generally get them financed by a bank or some financial agency. However, in order to ensure that the car loan you take remains a good debt, the interest rate at which you take the loan and the monthly premium paid towards it must be reasonable. Also make sure that the total loan amount must not exceed the actual value of the vehicle. If this is so, then you undoubtedly have a case of bad debt auto or car loan.

Amanda Lyttle is a financial consultant and a member of many financial communities. To find her articles on credit reports and score, click here.