Debt- The Good, The Bad and The Ugly
Many people think of debt as a bad thing, and in many cases, they're absolutely right. However, there are several instances where debt can be a good thing, and can help you achieve your financial dreams. Here's a primer on the difference between good and bad debt.
The Good Debt.
Certain debts can help you life a lifestyle otherwise impossible. Mortgages are a great example of good debt, if used properly: most of us could never afford to pay for a house out of pocket. However, with a down payment and a reasonable mortage that fits our budget, that debt provides us with home ownership- a dream for most families.
Car loans can also be good, for similar reasons. Most people need a vehicle to get to work (in order to make money and pay all the debts!) and are unable to pay for a car in cash.
Loans for investment properties. By taking a mortage on a house and renting it out, you are effectively leveraging debt to increase your assets.
The Bad and The Ugly Debt.
Debt can be a killer when it comes in the form of high interest credit cards, which siphon money from your budget at rates as high as 30%! Whenver you have debt on items that don't increase in value over time - such as a new stereo TV or DVD player- debt is working against you.
Your assets could become at risk if your debt is unmanageable. It also hurts your credit score if you miss payments, which in turns raises your interest rates both now and in the future. Higher interests make it less likely for you to pay them back on time, which again lowers your credit score and again increases the interest rates which lowers your... you get the idea. It's a vicious cycle, and should be avoided at all costs.
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