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Good Debt Vs. Bad Debt

Oct 12, 2007
When you sit down to pay your bills each month, you may find yourself feeling overwhelmed by the amount of money you owe. Your debt may feel like a mountain and you'll never overcome it. When a lender looks at your credit report to see what kinds of accounts you have, they will look at different types of debts in different ways. If you're working on getting lowering your debt, it is important to know which loans are considered bad and which are considered good.

Some Debt is Good
Some kinds of loans are actually very good investments. It might be difficult to believe, but it's true. If you are using a loan to finance something of value that will appreciate or add significantly to your financial well being, then that can be considered a good debt.

Some examples of good debt may be a student loan borrowed to finance education. It's a proven fact that people with college degrees earn more money over the course of their lifetimes, so a student loan can be considered an investment in yourself. Likewise, a mortgage loan used to purchase a home is considered good debt because homes typically appreciate in value.

And Some Debt Is Bad
Now you know what type of loans can be considered good. You should also know that you can incur bad debt as well. Anytime you borrow money to pay for something that can be used up, this is considered bad debt. Once you've consumed the item, there's no value in it, but you're left owing money on something you no longer own. This type of loan is not good for your financial well being.

Because credit cards are often used to purchase everyday items such as groceries or clothing that you will use or that will depreciate in value soon after they're purchased, credit card bills are often considered negatively.

Auto loans are also considered to be bad debt, because the vehicle will depreciate in value as soon as you drive it off the lot. Even though transportation might be a necessity, a car loan is still bad debt.

To maintain good financial health, you must make sure that you don't accumulate too many monthly bills, whether they are good or bad . It is possible to become overcome with the amount of money your owe, even if it's good, to the point that you struggle to make ends meet.
About the Author
Peter Kenny is a writer for Finance 123. Please visit us at Reward Credit Cards and Low Interest Rate Credit Cards
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