January 25, 2010

How to Distinguish Good Debt and Bad Debt

Many people assume that all debt is the same that is, bad. Is that true? Indeed it is not like that. Debt is like a knife. If the sharp side towards you, then it's bad debt. But if the sharp does not lead to you, then it's good debt. So you need to know how to distinguish the two types of debt.

Bad Debt
Quite simply, bad debt is any debt that does not serve the purpose, or increase the value. You will find that in many cases, this can be prevented. For example, if you spend $ 2000 on your credit card and pay only $ 1000, you will be charged approximately 18% interest on money left. If you often do this, then you will have a shelf full 1 credit card bills and powerless to repay. This is clearly a bad debt.
Examples of bad debts the other is to invest in things that will depreciate the value immediately after purchase.
If you consider the car an investment, you should think again. Because as soon as you borrow money to buy it, then the value of the car was straight down, it means the value of your investment will follow. That's called bad debt. For this kind of thing, would be better if you get to save money, and after your savings enough, you can take to buy the car you want is to pay cash. This is also a good way to make sure that you really want it. Or if you can not bear to be have a car for reasons related to mobility, then buy a cheaper car that you can afford to pay at once, without being in debt. Your heart may be difficult to accept this, but this is the way to save your financial position.

Good Debt
If your debt can help improve your score, it means good debt. For example, if you take out a loan to start a business. Because you use the loan money to build equity, you will be worth more in the future. This is good debt because it will eventually bring back. However, there are other ways to profit from the debt.
Many people do not realize that financing can be a good form of debt. This is often used to pay off bad debts, but the fact that you are reducing what you owe the good. So, if you have 3 credit cards with a total of $ 20,000 and charge your card 18%, would make sense if you take a home equity loan which will only cost you 6% interest. Although the initial amount is not lost, the fact that you pay 12% less each month. That means that you have to avoid to add a total of $ 2400 for each month. This can mean the difference between whether you can pay off credit card or continue in a vicious circle forever, because most people eventually pay only the interest on their largest debt. Investing in a home is another way to use debt to your advantage. The average homeowner's net worth more than ten times the average tenant. So the debt and invest in a home is a form of good debt because it can help you improve your value.

After knowing the difference between good debt and bad debt, now you must put it into practice. Make sure that your credit card for emergencies only, and do not take a bad debt, and be patient while your debts are working to form your investment that will improve your value.


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