In some ways, all debt is the same; you borrow money and pay it back in the future. However, different debts can be seen as more positive or negative in the eyes of a lender. Good debt can help you achieve goals, while bad debt is expensive and can possibly derail them.
What is “good” debt?
“Good” debt is considered money owed for something that could be considered an investment, such as student loans, business loans or a mortgage. As the old adage states, “it takes money to make money!”
What is “bad” debt?
“Bad” debt often refers to credit cards or other revolving debt that don’t add much financial value. Keep in mind that this is a simplistic explanation, as credit cards can still provide many benefits – such as cashback or other rewards – as long as you repay your monthly balances on time.
If you’re making purchases that increase your debt – and not your net worth – focus on paying down your debt instead to keep your debt-to-income ratio as low as possible to avoid being seen as a risky borrower.
Whether it’s borrowing for a degree, a new business, a car or a home, a good question to ask yourself before taking out a loan is, “Will this debt pay me back in some way?” The answer could help you determine whether taking on this debt is more burdensome than beneficial.
