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Good Debt Versus Bad Debt

Mar 12, 2008
Every time your bills arrive each month, you usually feel overwhelmed by how much of your income goes into paying debt. The common perception about debt is that it is a trap that one should escape from. However, there is such a thing as good debt. It may sound as an oxymoron, but in fact, some kinds of debt are looked upon by credit companies more favorably compared to others. If you really wish to get rid of your debts, you first have to understand which debts are good and which are bad.

According to experts, your total monthly payments for long-term debt should ideally be a maximum of 36 percent of your gross monthly income. This is one gauge that bankers consider in the assessment of the creditworthiness of a borrower. However, a lot of people exceed this limit. It is so easy to spend more than what you can afford especially when you have a credit card. In fact, according to http://CardWeb.com, a US household that has at least one credit card has a balance of around $9,200 on the average. It easy to understand why there are so many records of personal bankruptcies per year.

But avoiding debt through the total depletion of your cash reserves is not smart either. The challenge that all of us face is determining what debt should we incur and what we should not. From here, we should manage the money that we intend to borrow wisely.

Good debt basically includes all that you need but you can't afford to pay for without using your savings or liquidating your assets and investments. This includes things that will surely appreciate in value and will improve your financial health. Examples of good debt are mortgages and student loans. The value of property usually appreciates in value so it would be wise to take out a mortgage loan and invest in a good property. Student loans are taken out for the purpose of financing education. Having a good educational background usually implies having better chances of landing higher-paying jobs. Thus, you'll be sure to make more money in the future. If you think that availing of a certain kind of debt makes sense, then take out a loan which you know you can pay back with little or no difficulty.

Bad debt includes the unnecessary purchases you've made that you know you can't afford. This is the kind of debt that contributes to an unstable financial situation. An example is credit card debt that you use to finance avoidable purchases such as expensive vacation trips. It usually carries extremely high interest rates and this makes it very hard to pay it off. A good tip to remember is that you should never let your debt build up especially when you use it only to buy everyday things such as food or clothes. If ever you do use a credit card for such purposes, make sure that you have the capacity to pay the full balance every month.
About the Author
Wilson Field are leading insolvency practitioners that can provide free advice for Insolvency and Debt Problems . Benedict Smythe is a freelance article writer for Dolphin Promotions Ltd
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