Good Debt Vs. Bad Debt: Different Types of Debt

People go into debt for many reasons—purposely and without fault. Discover here all the different types of debts, good and bad.

8 out of 10 Americans experience some form of debt.

The dreaded four letters can seem inescapable. Debt is a scary and somewhat confusing thing. There are different types of debt.

Perhaps you have heard of good debt and bad debt?

Below we will explore types of debts and why they are labeled as such.

Good Debt

What is Good Debt?

Good debt is defined as debt that is used to further your net worth. This would be debt that is taken on to try and generate more money from.

Good debt is typically used to manage finances, buy necessary things and better prepare for unforeseen changes.

Good debt is typically seen in mortgage loans. These will typically be low interest. There is evidence to support, that people who buy a home are wealthier than those who rent. This is because a home can go up in value.

It’s important to not be greedy when buying a home with a mortgage. Growing into a home can end up being too costly and make you house poor. A mortgage is considered good debt when kept within a means to pay back.

Bad Debt

What is Bad Debt?

Bad debt is debt that doesn’t add long term value. This would be debt that is used to purchase goods or services with no long term value.

A payday loan is a loan in which cash can be taken out to pay bills. The idea is that the loan will be paid back after the next pay period, however, the loans provided typically have high-interest rates making them hard to stop snowballing.

Credit cards are also a bad type of debt to take on. Due to high-interest rates, and the ability to only make minimum payments credit card debt can grow and build for years, adding little to no value.

Types of Debts?

You work hard, it’s important to only take on necessary debt.

High-interest rates can easily build month to month.

Mortgage loans, student loans, and car loans are seen to be the best loans one can take. This is because they are investments. Used to try and add value to you.

Any loan can be a bad loan if it can’t be afforded, however payday loans and credit card debt should be avoided. This is because the high rates of repayment make getting out of debt difficult. If these loans can’t be repaid they will still accrue interest making a difficult situation even worse. If you need help, Find out how!

What Can You Do?

The average American home has roughly $16,000 in credit card debt.

Debt is a scary and common thing in the world today. With the knowledge above, the different types of debts can be managed. Good debt is debt that adds value to someones’ life. Bad debt, is debt with no monetary value in the future.

Debt doesn’t have to be scary. Things can be done to help a bad situation get better!

If you feel lost, we can help! You too can get out of debt, and get back to living life the best way possible!

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About FinanceGAB

Ajeet Sharma is a financial blogger and I am blogging since 2017. Financegab is a personal blog dedicated to personal finance. The main aim of this blog to help people to make well-informed financial decisions.
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