Debt is usually considered bad, however, that doesn’t take all aspects into account. Debt can actually be beneficial to your financial score in some instances. We brought in a panel of financial experts to discuss whether a debt is good or bad;
Craig Carter is the President & CEO of Jack Mason. According to Craig...
Debt can be good or bad depending on the type or amount. Good debt can help you build your credit. If you're able to pay off your debt in a reasonable amount of time, it can be considered good. For example, credit cards that are paid off over a matter of one or two months would be an example of good debt.
If your car loan is more than you can reasonably afford each month and you end up defaulting on the loan, that can be considered bad debt. Analyzing your debt to income ratio is important because it gives you an idea of how to manage or take on more debt.
Scott Nelson is the CEO of MoneyNerd Limited. We provide advice for those who are struggling to pay debts and are looking to improve their financial education. According to Scott...
I am very much a believer of the unconventional school of thought that not all debt is bad debt and being in debt or being short of money should stop you from investing. By this, I mean that a large proportion of the population believes that any form of debt is bad and you should avoid it at all costs - I disagree.
There are some debts such as student debt, mortgages, and any investment into a potentially higher returning project that you SHOULD do in order to improve your financial wellbeing. I would advise that if you see an opportunity to increase your income or assets such as taking out a student loan to go to university/an equivalent; taking out a mortgage to own a house or investing your savings into the stock market or a side hustle that you should definitely do it.
Just ensure you also have a steady income, control of your money/debts (with a budget), an emergency fund, and then all other finances you have you should look to better yourself or your situation. To do this, you should always avoid (or cut down) spending on depreciating assets such as clothes, cars, and food where you can find cheaper equivalents. To this end, any debt used for depreciating assets such as personal loans, credit card debt, or payday loans should be avoided.
Anna is a Chicago-based writer and marketing professional. She focuses on financial planning, debt management, investment, and career planning; Accredited Debt Relief. According to Anna...
Good debt is any sort of debt that carries a low-interest rate and will increase your net worth. Some examples include:
When you pay these debts, you end up with an object or a skill that could increase net worth over time. Mortgages and car loans are secured debt. Unfortunately, some debts that are seen as good can still get you into financial trouble.
For example, home loans traditionally have very low-interest rates, with an average of 2.5% to 8.75% from banks and 3% to 4% from credit unions; this is because the loan risk is much lower for the lender.
However, the 2008 mortgage collapse was a cautionary tale about subprime borrowing. A home loan is only good debt if you can afford it! You put yourself at risk if you borrow beyond your means.
Avoid these red flags to prevent a mortgage from becoming bad debt:
Bad debt is high-interest debt that will not increase your net worth but will cost you more money long term. Bad debt is also any type of debt that is more than you can afford to pay. Good debt can become bad debt if you borrow beyond your means or exceed recommended limits on your debt-to-income ratio.
Dustyn Ferguson is the personal finance aficionado behind Dime Will Tel where he blogs about his experiences and shares his secrets when it comes to making and saving more money to achieve financial success. According to Dustyn...
Debt can be considered good only if it's utilized properly. By properly using debt I mean using debt to buy income-generating assets. By taking out loans to buy income-generating assets, like real estate, you are using someone else's money to make yourself money. It's debt that is paying you more than you're spending by carrying the debt, and so it makes sense. This is a debt very wealthy people incur because they know about the power of leveraging debt.
Bad debt is any debt that takes money from you, without giving any in return. For example buying cars, electronics, jewelry, etc with a loan will only take money from you. Although you may view these as assets, and very well may be defined as such in some cases if they are costing you money without giving you anything in return it's best to view them as liabilities and avoid them as much as possible while trying to build wealth.
Sean Fox is the debt and consumer finance expert, and president of Freedom Debt Relief. According to Sean...
Credit cards and other types of debt usually create more problems than they solve. That said, most adults can benefit from one credit card for personal business which they commit to paying off in full, on time, every month.