What is Considered Good Debt?

If you have thought about getting out of debt, you may have heard the terms “good debt” and “bad debt.” In your efforts to pay off debt, you may be wondering whether you should consider certain kinds of loans. Since not all debt is created equal, you should try to avoid taking out “bad debt” if possible. In many situations, taking out “good debt” can actually be beneficial. If you have bad debt, you may want to consider debt consolidation.

Bad Debt

Although financial experts do not always degree, bad debt is generally debt on something that goes down in value, or that you don’t need and could pay for without going into debt. Charging your dinner or a new outfit to a credit card is an example of bad debt. You should pay cash for your dinner, and if you can’t afford the new outfit, you probably shouldn’t buy it. Another kind of debt that many, but not all, financial experts consider to be bad debt is debt on a car. Cars go down in value the minute you drive them off the lot. Although many people finance cars, there are often alternatives. Perhaps you could save a car payment for a few months and buy a used car with cash instead of financing a new car. If you have a lot of bad debt, debt consolidation may be a possible solution to becoming debt free.

Good Debt

Good debt is debt on something that generally increases in value, or adds value to your financial situation. Buying a home is a good example of good debt. Everybody has to pay money for a place to live, and getting a mortgage in order to avoid paying rent is often a sensible solution. Homes generally go up in value as well. Another example of good debt is debt that you take out to get a college education. A degree will help you get a better job and make more money. In many cases, good debt usually has lower interest rates than bad debt does.

Getting Rid of Bad Debt

If you have already overspent and gotten yourself into bad debt, and have the credit cards to show for it, you may be wondering how to become debt-free. It can be difficult to keep track of several credit cards and debt payments every month. You may wonder if a consolidation loan would help you. Debt consolidation is not for everyone. If you consolidate all of your bad debt, but still continue to use your credit cards to spend more money than you earn, you might find yourself in more debt than when you consolidated your debt. However, consolidation can be a useful tool for many people that want to get out of debt. It reduces the number of bills you have to pay and creditors that you have to deal with to one, rather than many. It can get creditors off your back, especially if you have been having trouble keeping track of all the bills you have to pay and have been accidentally making late payments. In many cases, you can also lower your interest rate when you consolidate debt. If you have decided to stop overspending and accumulating any more bad debt, consolidation may be the perfect solution for you.

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