Bad Debt Blues, Or Good Debt News?

There is a difference in the kinds of debt we carry, so if you find yourself discouraged about all the payments you seem to be making to loans, lines of credit, mortgages or others, consider what kind of debt you are really carrying. You may discover that you have a number of good debts, and that your bad debts are really under control, after all.

Good debt

Good debts are the kinds of things that increase in value when you buy them. You take on a mortgage to buy your house and that obligates you to a certain debt payment every month. Hopefully, though, your home will increase in value over time, and when you eventually sell it, your home will bring you more wealth. That’s a good debt.

Students worry about their student loans, and when you get that degree, it may seem like it’s mostly left you with a mountain of debt and not much else. But that debt should lead to a better job, more job opportunities, and higher wages. That’s a pretty fine return on your college investment, and is also a good debt.

Another good debt (or at least a better debt) is borrowing against your own investments. For example, under certain conditions, you can draw against your RRSPs to make a down payment on your new home. Then you pay yourself back. In the same way, if you open a line of credit that charges a rate of, say, 6% annually, and use it to pay off a high-interest credit card balance that’s charging at 17% annually, that’s a better debt, too.

Not all debts are good ones, of course, and you need to keep in mind that bad debts can not only lower your credit score, but end up costing you far more than the value of the original purchase that got you the bad debt in the first place.

Bad debt

Bad debts are the kind where you pay high interest on goods that have low value, or that fall quickly in value once you buy them. Take those oh-so-fabulous shoes at a three-figure cost that look fantastic on your feet-and lose half their value when you dance out the store with them. Worse, if you charge that purchase to a credit card, and take six months to pay off that debt, those shoes may cost you even more-all the time they’re worth less and less and less.

Missing payments on your credit cards, or carrying a high balance on your credit card month after month are also bad debts-because they negatively affect your credit card score.

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