What Is The Difference Between Good Debt & Bad Debt?

No one wants to be in debt. However, look at your credit card balance and see that you owe thousands of dollars. You may immediately begin to panic. However, some solutions can help you pay off your debt. Reading this review of TurboDebt can help you know more about your obligations and restore your financial score to a respectable level.

Before you can begin to fix the problems in your bank account, you need to know the differences between good debt and bad debt. Even though all debt seems like ‘bad’ debt, there are clear distinctions between these two debts.

How Can I Monitor My Credit Score?

You can use online services to monitor your credit score and see your trustworthiness and ‘creditworthiness’ regarding financial institutions and lenders. The number is often between 300 and 850, with a higher number being the better score.

Anyone with a debit card, credit card, or financial loan can use online services to check their credit score. One example of a website to track your scores, see what is helping or hurting your score, and analyzing your score is Smart Credit. You can see more at this site.

Sites like this one help you do the following:

• Track your scores with charts and in-depth analytical information
• See what factors are helping or hurting your credit score (length of the line of credit, appeals for new credit cards, paying your debt on time, etc.)
• Track your score to see when you should apply for credit, make outstanding payments, or spend money
• Provides a Smart Credit report to view your report and resolve debt issues
• Connects with nationwide banks, like Bank of America, US Bank, Citi Bank, TD Bank, and many others

What Is Good Debt?

Good debt helps you eventually reach your goals, by acquiring low-interest debt that can help you raise your income or net worth. However, you still need to keep an eye on this debt and monitor the level to prevent this beneficial debt from quickly turning into bad debt.

Student Loans

Student loans are a form of good debt that is often seen as an investment when being analyzed by banks or credit unions. These loans have low-interest rates, meaning you have to pay back very little extra when repaying your loan in the future.

• Try and keep the student loan payment below 10% of your monthly income after graduating from school. For example, if you expect to earn $30,000 at your first job post-college, make sure that the borrowing limit for your loan is less than $17,000.
• To prevent your college or student loan debt from skyrocketing after you graduate, do some reach on repayment options in your future, like refinancing, repayment plants, and other options to reduce the interest rate.

Mortgages

Taking out a mortgage on a home is the first step in calling a new house officially ‘yours’ at the end of the payment process. Often considered a big step in an adult’s life, taking out a mortgage is a loan that is seen as good debt.

• Know how much you can afford to pay per month for a downpayment on the house before shopping, keeping your limit to less than 35% of your annual income/
• Moving to a lower-cost area or finding a smaller space, like an apartment or condo instead of a 2-floor house, can be a smart move for new homeowners who want to keep their good debt manageable.

Car Loans

Similar to buying a house, taking out a payment on a car is seen as the ‘next step’ in many young adults’ lives.

• Keep the total automotive costs, including repairs, gas, loan payments, and other expenses within 20% of your income. Loan terms should be less than four years when paying off a vehicle to help manage your good debt.
• Refinancing an older vehicle can help you save money when paying for a new vehicle.

What Is Bad Debt?

When comparing good debt and bad debt, the latter is a type of money owed that harms your current financial situation and can put you on bad terms with banks. Debts that have high-interest rates, especially for items that lose value annually, can be seen as bad investments.

High-Interest Credit Cards

Although everyone wants a credit card to pay for items they can’t necessarily afford at the moment, choosing a high-interest credit card that has over 20% interest can make your bad debt higher.

• If you are not making progress paying off your credit card as you are spending money, this could be a sign that you are digging yourself a deeper hole when it comes to credit card debt.
• If you can limit your spending and pay off your debt, do this before buying a new credit card with a lower interest rate. If you can’t pay off your credit card debit, follow a debt management plan from a nonprofit agency to prevent accruing bad debt.

Personal Loans

Borrowing loans and money from the bank for non-necessary purchases, like vacations, new clothes, cars, or rent, can be seen as bad debt and an expensive waste.

• Limit taking out money for only necessary debts, like school loans and car payments.
• If you face an expensive personal loan, you should look into refinancing the purchase to fix your bad debt.

Payday Loans

Payday loans come with extremely high interstate rates that make them an immediate catalyst for debt, with unfair rates of over 300% to make them unaffordable and unsmart for any individual to purchase.

• If you are in an immediate bind that requires you to get money fast, consider alternatives like asking family members, friends, or a credit union to help you in your jam.

Conclusion

Figuring out your credit score can give you an idea of whether you can take out loans responsibly from a financial institution. Using online services, like Smart Credit, to check your score, see how you can improve your score, and determine when to make any payments is smart to keep your good debt and bad debt in check.