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23.01.2017

Good Debt Vs Bad Debt: All You Need To Know!

Many people see debt as a permanently bad thing. The idea of debt conjures up images of spiraling bills, plenty of stress and a rather messy looking bank account.

Whilst this is true for debt that is seen as “bad”, there are also aspects of debt which can be seen as “good”. This “good” debt should definitely be seen in a more positive light, and may not be something that you need to avoid.

So, how can you tell the different between the two? And how is debt ever good?

Good debt

When it comes to debt, there are times when you will use it to make a sensible investment. It will not have a negative impact on your long term financial position. Not only this, but some debt can improve your life and leave you better off in the long run.

If you are taking out a good debt, then you will have a specific reason for having to turn to credit. You will also have a realistic plan in place to make sure that you pay back the debt as quickly as you can, or in a set amount of affordable payments.

The types of people who will have good debt will often shop around before borrowing money. They will look at the variety of methods that are open to them, comparing interest rates and researching whether a credit card or loan is the correct type of credit.

They will be aware of the lowest possible interest rate, as well as the accounts that will have the lowest fees and the best benefits.

Here are some examples of good debt:

  • Student loans
  • Mortgage
  • Setting up your own business or investing into it
  • Buying an affordable car that will last you several years

These types of debt will make your life better, not to mention making you better off as the years go past. They are sensible investments that are being made for you to think about your future.

Bad debt

Whilst good debt has a long-term benefit, bad debt is often a drain on your finances and have no long-term positives.

Bad debt often comes with an ill thought out payment, with hugely unaffordable payments. It often is associated with impulse purchases, items that are not really needed, or even worse, borrowed to pay off everyday bills.

When it comes to borrowing money, you should always make sure that you can afford the monthly repayments. If you can’t, then it is bad debt, and should be avoided.

Bad debt comes in a variety of forms. The most common types include:

  • A luxury holiday that you cannot afford to pay back for
  • A brand new car that will not last you for the long term and is expensive to run
  • Borrowing money to pay bills or other credit commitments

All of these types of debt may seem like great purchases at the time, making you feel better. But in the long run they can end up costing you a huge amount of money that you will struggle to pay back. Sometimes people resort to further borrowing, in the form of Debt Consolidation Loans, in order to buy more time to repay debts such as out of control credit card balances.

How can I avoid getting into bad debt?

Now you know more about good vs bad debt there is a chance that you will want to learn more about how you can avoid the latter.

There are a variety of ways that you can make sure you won’t end up in bad debt- the easiest way is to ask yourself an assortment of questions before you sign the contract and agree to the debt. These include:

  • Will borrowing the money be an improvement on my finances in the long run?
  • Have I made the effort to shop around and get the best deal possible?
  • Is this the cheapest way to borrow money?
  • Can I afford the monthly payments?
  • What if the interest rates rise in the future? Will I be able to cover more expensive costs?
  • Are the terms and conditions relating to this debt clear?
  • What are the risks if anything goes wrong? Do I understand how they affect me?

Once you have answered these questions you will understand more about whether the debt that you are taking out is good or bad. If it is good debt, then go ahead, however if it has any negative effects then it may be worth waiting.

We all love buying new things and treating our families. However, there are times when these little treats and luxuries can cause a huge impact on your long term finances. If it is likely that this is this is the case for you, then maybe it is not the best time to make a purchase. Instead why not wait, save and see what will happen in the future.

If you are worried about your financial position, then perhaps you could benefit from speaking to an expert here at CreditFix?

We are on hand to make sure that your credit is the best that it can be, and save you from some of the stress, strain and worry that can come from a dire financial situation.

You should never have to deal with bad debt alone. With the right help and advice, you can make some changes and ensure that the debt you have is always a good debt!

More information on IVAs and Protected Trust Deeds can be found on our site.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.