Debt is usually characterized as being negative. In most cases, of course, it is. After all, no one wants to go through life owing money to anyone else. What some fail to realize, though, is that having some kinds of debt is very useful. These debts can help to build up your credit score and ultimately show banks and other lenders that you are a trustworthy and valuable borrower. Knowing the differences between the right kinds of debts and the bad, though, isn’t always as easy as you might think. It may help to take a look at what separates the two.
Good: Debt That Shows Growth
Good debt, generally speaking, is debt that shows potential for growth. This isn’t often debt that you’ll pay off in the short-term – it’s long-term debt for long-term projects. If you have higher education debts, for example, you’ll generally be judged favorably because it shows that you are attempting to put yourself in a better financial position. Even taking out a loan for a car can be useful, mainly if the car loan is used for a business vehicle. Anything that shows forward momentum in your life will generally be looked upon well by lenders and other financial institutions.
Bad: Low-Value Debt
Debt for low-value purchases is usually a terrible idea. In most cases, this means high credit card debt used to pay for unnecessary items. This isn’t to say that credit card debt is necessarily wrong – carrying less than twenty percent of your card’s limit can be great for your credit score. If you are maxing out credit cards or otherwise incurring high levels of consumer debt, you’re putting a great deal of bad debt on your plate. The best way to deal with this is to pay it off as quickly as possible and to get more debt info before you borrow.
Good: Debt That Shows Stability
Debt that shows stability is also beneficial for lenders. A mortgage, for example, is almost always considered a proper liability as long as it’s not one of multiple such loans. Likewise, business loans with a good payment history can be seen by lenders as indicative of your ability to be successful. Loans that help to establish you in a community and that are accompanied by substantial payment histories are usually the kind of debt that you’ll need to borrow more money in the future. These debts help your credit score and can typically help you.
Bad: High-Interest Debt
High-interest debt is almost always bad debt. These debts not only represent a dangerous type of loan, but they also serve a variety of bad decision making. Payday loans and cash advance loans are the most common types of high-interest debt to hurt credit, and they’re incredibly predatory in most cases. These loans not only have high-interest rates at their start, but they also tend to be accompanied by payment plans that are hard to keep. This, in turn, places the borrower in danger of falling behind on his or her payments and turning lousy debt into something even worse – horrible debt that shows a history of late fees.
Good: Low-Interest Debt
Conversely, low-interest debt is usually smiled upon by lenders. Low-interest mortgages don’t place as much of a financial burden on borrowers, and they often show that a lender already trusts the borrow. One of the most common good debts in this category is a home equity loan – a loan that already requires that you own a home and that you have some equity in it before you can qualify. Low-interest loans are generally considered good debt because you have to be in a stable financial position to get most of these loans.
It’s always a good idea to know the difference between good and bad debts before you borrow. While it can be difficult to avoid bad debt entirely, make sure it’s balanced out by a reasonable amount of good debt. No matter what type of debt you have, though, it’s important to remember to keep up with payments and to keep it to a manageable amount.