{"id":4399,"date":"2024-10-07T10:37:15","date_gmt":"2024-10-07T10:37:15","guid":{"rendered":"https:\/\/smartspending.ai\/good-debt-vs-bad-debt\/"},"modified":"2024-10-06T21:38:29","modified_gmt":"2024-10-06T21:38:29","slug":"good-debt-vs-bad-debt","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=4399","title":{"rendered":"Good Debt vs. Bad Debt"},"content":{"rendered":"\n<div>\n<p><span style=\"font-weight: 400;\">Debt is notoriously complicated. People all over the country are doing everything they can to <\/span><span style=\"font-weight: 400;\">get rid of it<\/span><span style=\"font-weight: 400;\"> \u2014 and avoid racking up more. But, we can actually use good debt to our advantage.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Yes, there\u2019s such a thing as good debt.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Debt can work as a tool to build wealth, increase your credit score, invest in your future and more when used responsibly. Let\u2019s take a look at the difference between the bad and good debt and how you can use it to your advantage.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What Is Good Debt?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The key to identifying good debt versus bad debt is understanding its purpose. Good debt helps build net worth with large investments (like a home) or further your career goals (like student loans). In the end, it should provide value.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Examples of Good Debt<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">In case you still don\u2019t believe us, here\u2019s what it might look like:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Mortgage<\/b><span style=\"font-weight: 400;\">: Real estate can serve as an investment into your future. Instead of renting, you\u2019re now putting your money toward something that could make you money in the future. However, it\u2019s still very possible to become \u201chouse poor.\u201d This happens when someone gets tangled up in a mortgage they can barely afford. <\/span>Determining how much of your monthly payment goes to your mortgage will depend on your financial goals, current debt and lifestyle. One method, suggested by <a href=\"https:\/\/www.chase.com\/personal\/mortgage\/education\/financing-a-home\/what-percentage-income-towards-mortgage\" target=\"_blank\" rel=\"noopener\">Chase Bank<\/a>, is to calculate 25% of your post-tax monthly income to determine how much you could comfortably pay for a mortgage each month. For example, if you make $6,000 per month, multiply that by 0.25. That gives you a budget of $1,500 per month.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Continuing education: <\/b><span style=\"font-weight: 400;\">Student loans have gotten a bad rap, even though<\/span><a href=\"https:\/\/www.cfr.org\/backgrounder\/us-student-loan-debt-trends-economic-impact#chapter-title-0-2\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\"> 43 million Americans<\/span><\/a><span style=\"font-weight: 400;\"> hold some level of student debt. Student loans allow you to pursue a career that requires a degree that you otherwise couldn\u2019t afford.\u00a0<\/span>You do still have to be smart about it. Though higher education can lead to more earning potential, it\u2019s not always the case. Do some research on your chosen career path to see how much post-secondary education you truly need to be successful.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Launching a business: <\/b><span style=\"font-weight: 400;\">If you have an entrepreneurial spirit, a loan to start or maintain a business is an investment into your future. You can either build the business as a lifelong career or with the goal of selling it.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Manageable credit card debt:<\/b><span style=\"font-weight: 400;\"> In most cases, you\u2019ll need a good credit score to get a loan for a house, car or business. You can build up your credit by responsibly using a credit card and paying off the balance every month. Some <\/span><span style=\"font-weight: 400;\">credit cards offer rewards<\/span><span style=\"font-weight: 400;\"> like travel points or cash back, so you\u2019ll be rewarded in more ways than one.\u00a0 \u00a0 <\/span><b>\u00a0<\/b><span style=\"font-weight: 400;\">\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">You can also use good debt to finance large purchases, like a car or home upgrades. However, any time you hop on the debt train, it\u2019s important to be realistic about what you can pay back.\u00a0 <\/span><span style=\"font-weight: 400;\">\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What Is Bad Debt?\u00a0<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Now, bad debt is what you\u2019ve heard horror stories about. It has high interest rates that make you feel like a hamster on a runaway wheel. You funnel all your extra income to it. And still, debt collectors start calling your office. Unfortunately, Americans have gotten comfortable carrying debt. The <\/span><a href=\"https:\/\/newsroom.transunion.com\/q1-2023-ciir\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">average personal loan balance<\/span><\/a><span style=\"font-weight: 400;\"> per U.S. consumer was at $11,281 in 2023, according to Transunion credit monitoring.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Examples of Bad Debt<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">What was once good debt can end up as bad debt \u2014 or it can be that way from the jump. These are some examples of where you are most likely to encounter bad debt:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Credit cards: <\/b><span style=\"font-weight: 400;\">We know that <\/span><i><span style=\"font-weight: 400;\">strategic<\/span><\/i><span style=\"font-weight: 400;\"> credit card use can be a good thing, but unfortunately, it can also give consumers a false sense of security with their spending. Credit cards with high interest rates can quickly turn a $100 purchase into much more when payments are spread out over several months. Plus, many credit cards carry annual fees. If you can\u2019t manage to pay off your <\/span><span style=\"font-weight: 400;\">credit card balance<\/span><span style=\"font-weight: 400;\"> every single month, avoid credit cards.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Payday loans: <\/b><span style=\"font-weight: 400;\">When you are short on funds and anxiously waiting for payday, a payday loan can look appealing \u2014 especially if an emergency comes up. Payday loans aren\u2019t quite as simple as the \u201ccash now\u201d they advertise. Lenders may charge up to a 400% APR (annual percentage rate) with only two weeks to pay it back. If you can\u2019t pay in full, you may be put under heavy stress to get such a loan paid back.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Upside-down loans: <\/b><span style=\"font-weight: 400;\">The housing market can be fickle. If you purchased your home while prices were high then your house value falls below what you purchased it for, you might be \u201cupside down\u201d on your loan. This means if you sell your house, you would still have a balance left on your loan \u2014 which you have to pay. The same scenario can happen with a car loan. <\/span><span style=\"font-weight: 400;\"><br \/><\/span><span style=\"font-weight: 400;\">If you find yourself \u201cupside down\u201d on your mortgage, you might want to stay put for as long as you can while you pay down your loan or the tides of the market change. If you have to move, talk to your real estate agent. They may have options for renting out your house to turn it into a source of income while you wait out the market.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Car title loans: <\/b><span style=\"font-weight: 400;\">This is another way people like to get cash fast. Essentially, you give a lender the title of your car as collateral in exchange for cash. The lender now owns your car. If you fail to make loan payments, they can seize it and sell it to cover your loan balance. Losing access to your car is no joke, so avoid car title loans if you can.\u00a0\u00a0\u00a0<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">Strategies for Staying Out of Debt<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">If you\u2019re worried about your good debt turning into bad debt, or it\u2019s already gotten there, these strategies can help.\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Start Saving Today<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Debt can often get out of control during times of crisis. Even if it\u2019s a little bit, budget to put some money into your rainy day fund. It\u2019s a good idea to have three to six months worth of expenses in your savings account. While that feels like a lofty goal, start small and add what you can each month.\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Pay Down Costly Debt First<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Take a look at your sources of debt and tackle the debt that is costing you the most first. This could be a high-interest credit card or a medical bill with a high monthly payment. Freeing up the money to pay down smaller balances can speed up your debt-free journey. And avoid these <\/span><span style=\"font-weight: 400;\">costly mistakes<\/span><span style=\"font-weight: 400;\"> when paying down credit cards.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Snowball Method<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">You can try the \u201csnowball\u201d approach. For example, if you owe $350 each month to your credit card company, $225 to your car loan and $175 on another credit card, you can focus on paying down your smaller credit card first. Once you pay it off, put that extra $175 per month toward paying down your car loan. Continue that pattern until you now have an extra $400 going toward the balance of your credit card debt.\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Get Realistic About Your Budget<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">A budget can help you build a good relationship with money. It doesn\u2019t have to be restrictive, but a tool to help you reach your financial goals. Budget for savings, debt\u00a0<\/span><span style=\"font-weight: 400;\">payments, and living expenses and be realistic about what you spend in other categories.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you can live frugally for a short while, you can unburden yourself from the pressure of bad debt and help your good debt stay that way. <\/span><\/p>\n<p>        <!-- ACF Financial Disclaimer --><\/p>\n<p>        <!-- End ACF Financial Disclaimer --><\/p>\n<p>        <!-- \n\n<div class=\"single-social-share-bottom text-center\"> --><br \/>\n                    <!-- <\/div>\n\n --><\/p>\n<p>        <!-- Newsletter Signup Form --><\/p>\n<div class=\"newsletter-signup-wrapper-for-digioh\">\n<div class=\"col-xs-12 newsletter-wrap flex-row\">\n<div class=\"container flex-container\">\n<div class=\"col-xs-12 new-newsletter-form\">\n<p class=\"text-subheading\">Ready to stop worrying about money?<\/p>\n<p class=\"text-get-daily\">Get the SS Daily<\/p>\n<p class=\"email-privacy-policy-blurb-white\">\n<\/p><\/div>\n<\/div><\/div>\n<\/p><\/div>\n<p>        <!-- End Newsletter Signup Form --><\/p><\/div>\n<p><script type=\"text\/javascript\" id=\"wp-fcapi-js-before\">\n\/* <![CDATA[ *\/\n!function(f,b,e,v,n,t,s)\n{if(f.fbq)return;n=f.fbq=function(){n.callMethod?\nn.callMethod.apply(n,arguments):n.queue.push(arguments)};\nif(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version='2.0';\nn.queue=[];t=b.createElement(e);t.async=!0;\nt.src=v;s=b.getElementsByTagName(e)[0];\ns.parentNode.insertBefore(t,s)}(window, document,'script',\n'https:\/\/connect.facebook.net\/en_US\/fbevents.js');\nfbq('init', '263664193816679');\n\/* ]]> *\/\n<\/script><br \/>\n<br \/><a href=\"https:\/\/www.thepennyhoarder.com\/debt\/good-debt\/\" target=\"_blank\" rel=\"noopener\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Debt is notoriously complicated. People all over the country are doing everything they can to get rid of it \u2014 and avoid racking up more. But, we can actually use good debt to our advantage.\u00a0 Yes, there\u2019s such a thing as good debt.\u00a0 Debt can work as a tool to build wealth, increase your credit<\/p>\n","protected":false},"author":2,"featured_media":4400,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rank_math_lock_modified_date":false,"footnotes":""},"categories":[221],"tags":[368,367,40],"class_list":{"0":"post-4399","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-debt","8":"tag-bad","9":"tag-debt","10":"tag-good"},"_links":{"self":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/4399","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4399"}],"version-history":[{"count":0,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/4399\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/media\/4400"}],"wp:attachment":[{"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4399"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4399"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4399"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}