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Too much credit card debt? There is a way out! Call Toll Free: Good Debt And Bad Debt Becoming educated about the differences between good and bad debt is instrumental when making sound financial decisions. Because of the consumerist culture that we live in, most people accept the fact that debt has become a part of mainstream society. However some debt can be used to build wealth while other debt serves only to detract from our wealth building efforts. Recognizing the differences between good and bad debt can assist consumers in making wise choices for long term wealth. Understanding the difference between good and bad debt does not have to be complicated. One of the markers of wealth building debt is that the purchase increases in value over time such as a home or other piece of real estate. Good debt can also be thought of as any investment that will result in an increase in wealth over time such as stocks, bonds and even business and student loans. Keeping these basics in mind can offer guidance as to what types of debt will serve to increase your bottom line. Recognizing bad debt is equally as important as it will help the consumer to recognize the types of purchases that may detract from their wealth building goals. Typically, items that decrease in value immediately after being purchased are considered bad debt. Examples of bad debt are store card purchases, credit card purchases and auto loans. David Bach, the CEO of Finish Rich Inc. and author of “The Finish Rich Workbook” stated ”When you buy something that goes down in value immediately, that’s bad debt…if it has no potential to increase in value, that’s bad debt.” Sometimes it is just necessary to make purchases that fall into the bad debt category such as an auto loan. In most areas of the country, having a car is practically a necessity for getting to work and for basic mobility. In this instance, when considering a purchase that will decrease in value over time, it is important to choose something that is within your financial budget. Making purchases that are difficult to repay and carry high interest rates are one of the leading causes of overwhelming debt and subsequent bankruptcy filings. If you must carry a balance on a purchase that will decrease in value over time, make sure that the monthly payments are affordable and will not detract from funds needed for other essentials such as food and housing. Although it is tempting to make purchases with credit cards because of the instant accessibility of funds, it is better to be prudent and only use your credit card for purchases that you can pay off immediately. Carrying a balance on credit cards causes the total amount of your items to increase over time, due to the interest rate on your credit card while the value of the item continues to decrease. According to Bach, “When you buy clothes, they’re probably worth less than 50 percent what you pay for them when you walk out of the door.” Recognizing the differences between good and bad debt can help consumers in making wiser financial choices. The best way to tell the difference between good and bad debt is to recognize purchases that will either maintain their value over time or increase in value versus purchases that decrease in value over time. Keeping these guidelines in mind will offer clarity when making financial decisions that will affect your future. [
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