Oct 19, 2020
 in 
Business

Building Good Debt Verus Bad Debt - What's The Difference?

 BY 
Kristin Kerr
C

ar payments, student loans, mortgages, oh and we can’t forget the never-ending credit card bills. Debt is about as normal as waking up in the morning and brewing a cup of coffee, but what’s all this talk about building good debt versus bad debt? For most people, the idea of debt has negative connotations associated with it, but good, manageable debt does exists and this is how it works.

Why Would I Want To Build Debt?

Great question! In a nutshell, having good debt in your life can assist in building a more financially secure future. That being said, don’t go and rack up thousands in credit card debt or procrastinate paying that parking ticket until the fee triples; gaining good debt is a tactic to build up a solid credit history and gain a good credit score. Without any form of debt track record, it would be extremely difficult, if not impossible to gain these things.

How To Do It

It’s important to understand that it isn’t the debt itself that is the important aspect – it’s how well you manage to pay it back. Building good debt is kind of like showing the world you can borrow something and give it all back, not hold onto it forever. In return for doing this, your credit score will be boosted, and that’s the big number lenders look at when you’re looking to make a substantial purchase. Remember the game of Life? Yeah, it’s kind of like that, except ‘winning’ is equivalent to having a high credit score.

What Is Considered Good Debt?

Another great question. Is good debt everything under the sun that you can finance over a period of time? Seems accurate, right? To put it simply, if your investment won't go up in value or generate income, you shouldn't go into debt to buy it. Some of the most common forms of investments when it comes to building good debt include college education, small business ownership, and real-estate investments. Notice a common trend with these three examples? They all have the potential to grow into something more.

Source

And The Bad?

These are the kinds of purchases that seem so tempting and fun, but we end up turning down the majority of the time. Some notable items related to bad debt can include clothing, credit cards, and even cars. These types of purchases are often made out of want not need and can end up costing you lots of money down the road.

The Solution: Be Debt Smart

Building debt, good or bad, can be a scary thought for a lot of people, and unfortunately, it can also cause a lot of stress, leading to feelings of shame. According to research by N26, an online bank, 9.5million Brits suffer mental health issues because of money concerns.

The only way to become more familiar with the topic is to educate yourself on it! Understand the differences between if the debt will help you in the long-run, and if you can or cannot financially support the payments that are yet to come. Take some time to research large purchases before you make a move, and if you find yourself spiraling out of control, try downloading apps like Mint or Credit Karma - two useful developments designed to track your credit score and monthly payments.

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