Here are great pointers you can use to effectively distinguish good- from bad forms of debt.
What is Good Debt?
First and foremost, let’s consider what can be considered good debt. There are actually credit accounts that can help boost your credit score and convince lenders that you are a good credit risk. These forms of debt normally include mortgage loans. After all, with such credit programs, the value of the properties you intend to buy can skyrocket, as time passes by. In fact, within the next ten to fifteen years, you will eventually realize that the overall worth of your house and/or lot is much higher than the sum of cash you borrowed from a credit agency. No wonder more and more consumers today are opting to invest in real estate properties by signing up for mortgages loans!
Student loans are another example of good forms of debt. After all, what you will soon earn as a young professional can be so much more than the actual funds you borrowed, while pursuing your degree. This is the main reason why young consumers these days decide to apply for student loans, to jump-start their credit profiles, as soon as possible.
How to Distinguish Bad from Good Debt?
Now, let’s talk about tips that will help you differentiate one from the other.
- Determine which credit accounts can have a positive effect on your credit standing. As was mentioned above, mortgage and student loans are among the best items you can have on your credit report to jump-start or maintain an excellent credit history.
On the other hand, credit accounts you use to purchase consumable items, such as credit cards and revolving lines of credit, are often considered bad forms of debt. Hence, to prevent them from inflicting damage to your credit history, you should pay close attention to how you manage them. By doing so, you can avoid committing missteps which can cost you your good credit standing.
- Bad debts usually carry steep rates of interest and fees. Keep in mind that student and mortgage loans usually come with reasonable interest rates and charges that will absolutely match the financial requirements and capabilities of most consumers, nowadays. Meanwhile, bad forms of debt, such as credit card accounts, tend to carry high rates of interest and excessive fees, which can prove to be burdensome to your pockets. So, to keep your credit payments minimal, you should always prioritize paying your bad debts first.
- Good forms of debt often come with much longer repayment periods as compared to most revolving lines of credit and various credit card programs. This means that with good debts, you can enjoy a leeway in terms of submitting payments to your creditors – something that will never be present in bad forms of debt.
This is why we encourage first-time credit consumers to take advantage of long-term credit offers they will receive either from online or offline lenders. By doing so, they can improve their chances of building an excellent credit profile, in the coming months.