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What Is the Difference Between Good Debt and Bad Debt?

Most of us are familiar with the terms “good debt” and “bad debt”, but what do they mean?  It may seem counterintuitive to consider any debt “good”.  However, the health of your credit score greatly relies on debt and your ability to handle it.  To better understand what types of debt you want, you have to know which kinds help you the most.

Good Debt

For a debt to be good, it must be essential to your life or help your credit score.  Examples of good debt are typically:

  • Student Loans – This is being debated more and more as time progresses, but for many people, it is a way of life. Many jobs are just simply out of reach for people without a college degree.  Typically, student loans have a low-interest.

  • Medical Bills – This debt is not always avoidable. It is not realistic to call medical bills bad debt.  It can become bad debt if you do not pay them and the balance gets sent to collections.

  • Starting a Business – Almost all new business owners operate at a loss in the beginning, but this is seen as an investment.

  • Real Estate – This includes buying a home. As the adage goes “a house is most likely the biggest investment you will ever make”.  For most of us, this is true and as long as the house is in good shape and stays that way.

  • A Used Car – This is a debt of necessity. You can get a very nice, lightly used car for much less than a new one.  This is good debt if you do not overspend.

Bad Debt

This type of debt really lacks in the “long-term benefit” department.  If you are making a decision to create a debt to support instant gratification, it is most likely a bad debt.  Examples include:

  • Credit Card Debt – Now, sometimes you have to use a credit card to get by, but that is the only time you should use it (with the exception of making small purchases and paying the whole balance to build credit). Credit card interest rates average at over 17% and there is no long-term benefit.

  • 401k Loans – When you take a loan from your 401k, you are basically taxed twice (once when you take out the loan and once when you withdraw at retirement). You can also get hit with huge penalties.

  • Personal and Payday Loans – These may be the single worst bad debt in existence. The interest rates are borderline criminal at 50% – 2000%.  The payment plans are tricky and fine print is meant to make it difficult to pay back.

If have gotten yourself into trouble with debt, you have options.  You just need the skills and experience of a top-notch attorney.  Elias Dsouza is that attorney.  Elias has been helping people navigate the complex issues of debt settlement, credit restoration, and defense against predatory lenders for over 15 years.  Contact Elias today for a free consultation.

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