Is Your Debt Good or Bad?
Not all kinds of debt are bad. People also need good credit history in order to build their credibility and
reputation. In this article, we’ll consider the differences between good debt and bad debt.
Good Debt vs. Bad Debt
What kinds of debt can be considered bad? To explain it briefly, bad debts are debts that are spent on consumable things. Examples of consumable things are food, clothes, vacations, and other items that do not appreciate in value.
For instance, whenever you charge your groceries, restaurant bills, and other purchases to your credit card, and you only make the minimum payment each month, you are building up bad debt. Why? Because the debt you owe are charged with additional interest and penalties that you end up paying more from what you’ve really spent.
Apart from credit card debt, you can also acquire bad debt from delaying or missing payments on your mortgage loans, personal loans and insurance bills. Whenever you miss your deadline of payment, you incur an interest charge on your account.
What about good debt?
What are the charges that can be considered good and acceptable? These are debts that increase in value over years. A very good example is a mortgage loan. When you buy a house, you obtain a mortgage loan to pay for it. As years pass, the value of your property does not depreciate. On the contrary, your home increases in value. The cost of your home today can double after 10 years or more.
They key to acquiring a mortgage loan is paying off your monthly payment on time. Every consumer must be aware that even a single miss on your mortgage payment can put you at risk of losing your property.
The bank could file a foreclosure proceeding against you if you fall behind three consecutive payments. If you don’t act immediately, you’ll find it difficult to stop the foreclosure process once it’s been filed against you.
Yes, a mortgage loan is a good debt because it is an investment. Nevertheless, it’s important to remember that a mortgage loan is also a serious responsibility because it uses your home as a security against your debt.
Should You Acquire Debt
The fact is, acquiring any type of debt should be viewed as a serious responsibility. This doesn’t mean however that it’s better to live without any credit. If you don’t have a personal credit history, how will creditors be able to check your background or credit worthiness?
Sooner or later, you’ll need to apply for a loan- whether a car loan, a personal loan, or a mortgage loan- you’ll be applying for credit and your creditors would be making a check on your credit history. Without a credit history, creditors would most likely decline your application.
Furthermore, creditors are not the only one who checks on an individual’s credit history. Even landlords and employers also use this important piece of document to check on the individual’s credit worthiness. Therefore, acquiring good debt is also an advantage.
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