How to Differentiate Between Good & Bad Debt
Learn How to Tell Them Apart to Improve Your Credit Score
by Derek Campbell
When you think of debt, likely lots of bad thoughts are associated with it. But in reality, not all debt is considered to be bad. Believe it or not there is such a thing as good debt. Knowing the difference between good and bad debt will help you to better manage your finances and your credit score.
Types of Good Debt
There are various forms of what we call good debt. By having these, it looks good on your credit report (as long as you’re paying them on time). Some examples of good debt are mortgages, school loans, business loans and other real estate loans. The idea of good debt is for the property to raise or have stabilized value, rather than to decrease, like with bad debts.
Types of Bad Debt
As mentioned, bad debt is associated with property that decreases in value as soon as you get it, including auto loans, credit cards and store credit cards. You want to minimize the amount of bad debts that you have in your financial books so that you don’t burden yourself with too many things that will harm your credit if you end up defaulting on them.
Good Debt vs. Bad Debt
Good debt is basically an investment. This means that when you get it, the value of it eventually raises and can be resold or liquidated for more money than what was put in, giving you a profit. This is why most banks and lenders want you to use your good debt assets as collateral on loans. It’s also a good idea to obtain debts/property that are tax deductible. Anything that will produce you wealth in the long run is a good debt.
Bad debts are disposable items, like a car or credit card, or items that you buy using those credit cards. For instance, you may use your credit card to purchase food, clothing and furniture for your home, which are all perishable and lose value as soon as you buy them. But if you were to buy a home using your credit card, you’ve just created a good debt (the home).
All in all, it is best to create debt that is good. If you are borrowing money from a loan or credit card to buy things that have decreasing value, then it’s a bad debt. You want to avoid doing this at all costs because in the long run, if you end up defaulting on your payments, because you lose work or can’t afford them anymore, then you can’t sell it to pay off your debt. With good debt, you’re able to use what you purchased to pay off your debt (i.e. sell your home, land or business).
Since 1997, CashAdvance.com has been the most established and trusted name in the cash advance industry, connecting over a million consumers with payday loans from its vast network of reliable lenders.
© 2012 CashAdvance.com All Rights Reserved.
CashAdvance.com is Hawk, LLC, which is a limited liability company chartered pursuant to the laws of the Ute Indian Tribe and is wholly owned by enrolled members of the Ute Indian Tribe. By your use of this website you consent to the laws and jurisdiction of the Ute Indian Tribe as it relates directly or indirectly to your use of this website.
Consumer Notice: A cash advance, also referred to as a payday loan or payday advance, is a small, short-term loan that is intended to cover a borrower's expenses until the following payday. Cash advances are intended for short-term financial relief and do not constitute long-term financial solutions. Consumers facing debt and credit difficulties should seek out debt and credit advisory help. Consumers are encouraged to consult our State Consumer Resource pages to learn more about the risks involved with cash advances, local laws and regulations that may be applicable to cash advances, possible loan alternatives and recent developments in their state.
Legal Disclaimer: This website does not constitute an offer or solicitation to lend. CashAdvance.com is not a lender, does not broker loans, and does not make loan or credit decisions. The operator of this Web Site is not an agent, representative or broker of any lender and does not endorse or charge you for any service or product. CashAdvance.com provides a service only and is not acting as a representative, agent, or correspondent for any service provider or lender. CashAdvance.com's aim is to inform users of possible lenders who may be able to satisfy the needs of a particular consumer. CashAdvance.com does not endorse any particular service provider, lender, nor loan product. You are under no obligation to use CashAdvance.com's service to initiate contact, nor apply for credit or any loan product with any service provider or lender. Service providers or lenders will typically not perform credit checks with the three major credit reporting bureaus: Experian, Equifax, or Trans Union. However, credit checks or consumer reports through alternative providers such as Teletrack or DP Bureau, which typically will not affect your credit score, may be obtained by some service providers or lenders, in certain circumstances. You will not be charged any fees to use CashAdvance.com's service. Learn more on our Rates & Fees section.
Availability: Residents of some states may not be eligible for a short term cash loan based upon lender requirements. CashAdvance.com does not guarantee that completing an inquiry form will result in you being matched with a service provider or lender, being offered a loan product with satisfactory rates or terms, nor receiving a loan from a service provider or lender.