Under the right circumstances, taking on debt can positively affect your finances. The secret is in knowing the difference between good debt and bad debt.
Good debt is debt used to finance something that will create value. One example of good debt is a student loan because an advanced degree can improve your future earnings.
Another example of good debt is a home mortgage. When you’ve paid the loan off in 15, 20 or 30 years, the home could be worth much more than the purchase price.
While good debt is a type of investment, bad debt is financing something that won’t go up in value or generate income.
Cars, clothes, and consumables are examples of bad debt - it’s better to pay cash for what you need than to pay interest fees on these items.
Probably the worst kind of debt is credit card debt, especially if you don’t pay your balance in full. You’re charged interest on the outstanding amount and it’s typically a higher rate than on any consumer loan.
However, if you pay off your credit cards each month, it can help you to establish a good credit rating for future purchases like a home - just never take on more debt than you can afford.
For more information about how to handle credit and debt, please give us a call today.