For most people, debt is a fact of life. Not all types of debt are equal, however and whilst many types of debt are bad, some can be considered good and even beneficial.
Why are we in so much debt? We live in a world where credit is readily available and this, combined with the consumer society that we find ourselves in, makes it easy to amass a level of debt that would have been unheard of in previous generations.
There are many different financial products on the market that help us manage our debt. Whether it’s credit cards, loans, mortgages or business loans, the chances are you’ll need credit at some point.
The sheer volume of financial products has led to the growth of comparison sites such as Moneysupermarket, making it easier to compare the differences between products.
But how do you know if it’s good debt or bad debt that you are opting for? Good debt is essentially any debt that creates value.
The most popular form of good debt is a mortgage, as it builds wealth over the longer term. As house prices have continued to rise in recent years, investing in a home is generally still held to be a pretty safe bet.
Business loans can also be a form of good debt. By allowing a business to develop and grow, such loans can finance expansion and increase margins.
Switching credit card providers or arranging a loan is another type of good debt. If the amount you end up repaying is less than under your existing arrangements, then you are essentially reducing your level of overall debt.
Not all debt is good, however and bad debt can have an impact on your finances at best and lead to many problems if left unchecked.
Bad debt generally occurs when buying goods that lose their value, especially when purchased on a credit card that is not paid off in full. Such goods cost much more than their purchase price, as they continue to lose value whilst interest continues to be payable until the balance is paid off.
Vehicles are another example of bad debt. It can be all too easy to opt for a higher spec vehicle than you actually need, costing more. Using debt to switch to a vehicle with a better fuel consumption can, however, be financially prudent.
Sometimes you can think that you are opting for good debt but are mistaken. Store cards are a prime example of this, usually offering a discount on purchases. If you fail to pay them off in full, however, the interest payable can be much higher than under a standard credit card.
Having good or bad debt can have an impact on your overall credit rating. Skip a payment and it may be recorded, making it harder to borrow in future. Demonstrate financial responsibility by borrowing sensibly and meeting repayments and you could benefit from the most competitive rates available when borrowing again.
So why do so many people have too much bad debt? Most schooling does not include personal financial management as part of the syllabus.
As it is likely that our children will grow into adulthood in a world where debt is the norm, it makes sense to teach them how to manage money from an early age, whether this is by giving them an allowance or paying them to complete chores.
With greater education, they will recognise good and bad debt and be able to differentiate between the two. When it comes to choosing loans, credit cards and other financial products, they will then have the advantage.
Sam is a financial writer at Moneysupermarket.com, and writes about things like loans and savings.
Related articles
- Good Debt vs. Bad Debt (clarkting.wordpress.com)
- Good Debt or Bad Debt | The Crayola Approach (christianpf.com)
- Is There Such a Thing as Good Debt? (christianpf.com)
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About the Author
The best way to manage debt is sticking to a budget.
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