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You have probably heard, more than once by now, that not all debt is created equal. Some types of debt are beneficial, while others, not so much. As consumers, understanding the difference can have a profound effect on your credit score and how lenders view your spending, buying, and borrowing habits. These are the things you need to know about the types of debt worth having.
Good Debt
Many individuals believe all debt is bad. It represents money you owe. For these people, the amount of debt they owe places them solidly outside of their comfort zone. However, some debt is viewed more favorably by lenders as signs of responsible borrowing than others.
The underlying theme for all of these is that good debt is debt that has the potential to help you add to your net worth, either through the appreciation of assets or generation of income. If your goal for borrowing money is for a different purpose or goes in a different direction, it will likely fall in the ‘bad debt’ category.
Bad Debt
Bad debts involve assets that depreciate over time. These debts are not considered investments so much as they are considered consumption. The idea being that if items do not increase in value or generate wealth, people should not go into debt to purchase those items. Prime examples of bad debt include:
These debts do not lift families out of debt and may doom them to struggle with debt for longer than necessary.
Other Considerations
While we do live in a consumer-driven society and debt is an often necessary fact of life, the types of debt you have can profoundly impact your quality of life and ability to have the things you desire most in the end.
The best words of wisdom to offer on the debt front involve keeping your debt focused on things that can help you increase your net worth and reducing debt that does precisely the opposite, whenever possible.