Is there such a thing as good debt and bad debt?
Debt is neither good nor bad. Some people classify all debt as bad, but that isn't necessarily fair.
Some debt cannot be avoided and is easier to manage, while other debts may be crippling and harder to pay off.
One type of debt doesn't negatively impact your score directly, but if you have a large debt, that may impact your score due to your utilization ratio.
Some debt is considered to be "good" if it is a low-interest debt.
For example, a mortgage and car loan has a low-interest rate.
These types of debts are very normal for most families to have. Ideally, it's best to pay off these quickly. However, it can be difficult to save up the full amount for a car or home to pay with cash. Having these types of debt has repayment plans that are easy to manage.
Some debt is considered to be "bad."
These types of debt have a higher interest rate, such as credit card debt. It can be difficult to pay off credit card debt due to compound interest.
Student loan debt can also be seen as a bad type of debt, even though it has a lower interest rate and is usually necessary for someone to receive higher education.
While most student loan debt interest is not that high, it has the same compounding effect as a credit card if you pay your debt off with anything other than the standard ten-year repayment plan.
It also is bad because of how much student loan debt the average person has. A person's average student loan debt is around the same price as a brand-new car. That amount of debt is hard to pay off when you are just becoming a working adult.
Student loan debt isn't bad in nature, but it can become bad when not managed properly.
Having credit card debt can be very crippling due to compound interest.
If you cannot make extra payments and only make minimum payments, it will take you longer to pay off this debt, and you'll owe much more on the items you bought due to interest.
The interest rates for credit cards are so high that you'll end up paying back so much more in interest than the actual item cost. If you cannot pay even your minimum payments, then that can hurt your credit score even more.
Payment history is the largest factor in your credit score. Credit cards can be a great tool to get cashback and travel points, but they can be a very dangerous kind of debt if your balance is too high.
Being Debt-free is a goal for many individuals. Unfortunately, the debt-free movement very easily labels all debt as bad.
Most people tackle smaller debts like a credit cards, medical bills, and student loans first because they are smaller amounts. Mortgages and cars are the next debts that are tackled.
While being debt-free can free up your income to allow you to save for other financial goals, it is not always possible for everyone. Labeling all debt as bad debt can make someone feel like they are not financially responsible. The goal is to have good kinds of debt that you can manage and eventually pay off.
If you cannot be debt-free, there are some tips on using debt wisely, so you protect your credit score and still reach your financial goals.
If you are looking to purchase a house, you can do a few things to make the best decision while having a mortgage:
This seems obvious, but really think about how much you feel comfortable paying every month for the next 15 to 30 years.
This will give you more home equity and lower monthly payments.
Your monthly payments will increase, but you won't have as much interest to pay compared to a 30-year mortgage.
If you currently own a home or have a car lease, you also have some options.
This is an easy process and has a few fees, but your monthly payments will be lower if you refinance. In addition, the lower monthly payments may allow you to pay off your house or car faster because you've freed up your income.
You will have to be able to pay off this credit card debt by the end of the introductory rate and be able to afford your monthly payments. This can be a good option if you have an emergency, like your AC unit going out or your need new tires.
These are things we need but can cost a lot. Only use a credit card like this if you know you can pay off the total balance a month before the 0% interest rate ends.
It may be tempting to refinance your student loans, but if you have federal student loans, do not move them to a private company.
First, the student loan forgiveness program is only for federal loans. If you move your loans, you will not have these options of forgiveness or repayment pauses. Also, when you refinance, you bundle your multiple loans into one big loan.
If you keep the loans individually, pay off the smallest ones first to lower your monthly payment. This will then help you tackle the larger ones. You can't lower your monthly payments if you have one big loan.
Depending on how you look at it, debt can be a good thing and give you opportunities.
Debt can also be a bad thing and give you fewer opportunities. The type of debt you have can be good or bad, depending on the interest and type of debt. For example, credit card debt is on the bad side, while a mortgage is on the good side.
There are ways to use debt wisely by making sure you can make payments and pay off your debt earlier.
March 23, 2023